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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Expert Insights Technology Stocks

Change in elective surgery restrictions have minimal long-term impact for Ramsay

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

Business Strategy and Outlook

Ramsay’s strong Australian business enabled its global acquisitions but the market fundamentals offshore are far less attractive. The key differentiator is the proportion of private health insurance, or PHI, coverage of the population. According to data from the Australian Prudential Regulation Authority, 45% of the Australian population have PHI resulting in roughly 80% of Ramsay’s Australian revenue flowing from PHI versus 20% or less in its other geographies. This has a direct impact on profits earned as providers are price-takers in publicly outsourced work.

Despite various pandemic pressures weighing on Ramsay, the firm is increasing its capital expenditure to better position itself for long-term growth. The key areas of investment are brownfield and greenfield expansions in Australia, and digital overseas. Ramsay is focusing on increasing its day surgery capacity as the proportion of day surgeries at Australian private hospitals has increased to roughly 65% from 60% in the last 10 years. The firm also sees opportunity for integrated care and higher-margin non-surgical ancillary services such as rehabilitation and mental health.

Financial Strength

Ramsay’s planned acquisition of Spire Healthcare in 2021 didn’t eventuate leaving the company in a stronger financial position as a result with pro forma net debt/EBITDA pre-AASB 16 of 0.7 at July 2021. However, due to the pandemic weighing on earnings, the acquisition of Elysium, and sustained elevated planned capital expenditures, it is forecasted leverage to peak at 3.3 in fiscal 2022 but fall under 2.0 by fiscal 2026. As Ramsay Australia owns most of its properties, the group has extra optionality if ever capital constrained. While free cash flow conversion of earnings averaged 98% over the last five years, it was boosted in fiscal 2020 due to the French government prefunding all outsourced work which contributed to a working capital inflow of AUD 526 million.

The dividend is largely underpinned by the Australian business.The capital structure includes AUD 252 million of Convertible Adjustable Rate Equity Securities, or CARES, on which Ramsay pays a fully franked dividend equivalent to a margin of 4.85% over the 180-day bank bill swap rate after tax which is high in the current funding environment. The CARES funding is not material in terms of the capital structure of the business overall, but it is unclear to us why the securities were allowed to step up to this high rate rather than being refinanced given the availability of cheaper debt. Review of the largest CARES holders doesn’t reveal any material related parties.

Bulls Say’s 

  • Ramsay boasts leading market positions in most of its geographies and benefits from negotiating power with payers and cost advantage derived from scale. 
  • Ramsay is a stable compounder with its healthcare services being highly defensive and underpinned by strong demographic factors. 
  • Its premium Australian business is being diluted by lower-margin and lower-return businesses overseas with higher exposures to publicly outsourced work and associated regulatory risk.

Company Profile 

Ramsay Health Care is one of the largest private healthcare providers in the world, with over 460 facilities across 10 countries. The key markets in which it operates are Australia, France, the U.K., and Sweden. It is the largest private hospital group in each of these markets except for the U.K. where it ranks fifth. Ramsay Sante, which operates the European regions other than the U.K., is a 52.5%-owned subsidiary of Ramsay Health Care. The company typically earns about 60% of consolidated earnings in Australia and 30% in France. Ramsay Health Care undertakes both private and publicly funded healthcare.

(Source: Morningstar)

General Advice Warning

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

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Technology Stocks

Soaring Lithium Price, a Material Fair Wind for Mineral Resources

Business Strategy and Outlook

Mineral Resources grew significantly following listing on the Australian Securities Exchange in 2006. Demand for crushing and screening services grew strongly with iron ore output from the major Western Australian iron ore miners. Mineral Resources also rapidly expanded its own iron ore mining business, though lacking the integrated rail and port infrastructure of major competitors and at a competitive disadvantage. More recent diversification into lithium production at Mt Marion and the Wodgina mine has sustained earnings momentum. 

The financial record to now is impressive and the balance sheet is unleveraged. 

In fiscal 2010, the company was a mining service provider and minerals producer as now. But disclosure extended to just iron ore production tonnage, and segment earnings. Mining Services and Processing contributed 96% of group EBIT. Step forward to fiscal 2020 and Mineral Resources has materially improved its level of financial disclosure, and the greater depth of clients and number of project sites also reduces risk.

 The business model of the company is demonstrably sustainable. The volume-linked crushing and screening business should be somewhat more resilient to commodity price weakness. Mineral Resources’ mining services business builds, owns, and operates crushing and screening plants on behalf of mining customers. Despite contributing only 40% of group EBIT, Mining Services is core. Twelve 5 to 15 million tonne per year crushing and screening plants are owned and operated on 12 sites. 

Clients substantially include the largest mining companies and contract books have been renewed over time leading to volume growth. Power is supplied by mining companies and margins are comparatively stable. Bolstering growth in the core business centred on mining services around Australian bulk commodities, Mineral Resources will selectively own and develop its own mining operations, with the aim of subsequent sell-down while retaining core processing and screening rights

Financial Strength

Mineral Resources is in strong financial health. Albemarle’s acquisition of a 60% stake in Wodgina lithium instantly expunged net debt in first-half fiscal 2020. From a net debt position of AUD 872 million at end June 2019. Lithium project construction expenditure was at the core of the cash drain. The current circumstance is a return to the usual territory for Mineral Resources, which operated in a position of little to no net debt for at least the eight years to fiscal 2018; a sensible position for a company operating in the volatile mining services space. 

Mineral Resources had faced the key question of what it should do with its cash, with a shrinking pool of growth and investment opportunities in a lower iron ore price environment. A failed investment in Aquila Resources in 2014 attempted to leverage Mineral Resources into Aquila’s West Pilbara Iron Ore Project, and was symptomatic of where Mineral Resources found itself. Booming lithium markets directed the investment decision. Mineral Resources had AUD 595 million in net cash excluding operating leases at end June 2021. 

Bulls Say’s

  •  Mineral Resources grew strongly since listing in 2006.The chairman and managing director have been with the business for over a decade and have meaningful shareholdings.
  • Australian iron ore is mainly purchased by Chinese steel producers, meaning Mineral Resources offers leveraged exposure to Chinese economic growth.
  • Mineral Resources has a recurring base of revenue and earnings from processing infrastructure.
  •  Mineral Resources’ balance sheet is very strong with net cash. This has opened up the opportunity for lithium investments selling into highly receptive markets.

Company Profile 

Mineral Resources listed on the ASX in 2006 following the merger of three mining services businesses. The subsidiary companies were previously owned by managing director Chris Ellison, who remains a large shareholder despite selling down. Operations include iron ore and lithium mining, iron ore crushing and screening services for third parties, and engineering and construction for mining companies. Mining and contracting activity is focused in Western Australia.

(Source: MorningStar)

General Advice Warning

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

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Shares Technology Stocks

Reinitiating Coverage of Ceridian HCM With Narrow Moat, Stable Trend Rating and $80 FVE

Ceridian offers payroll and human capital management solutions via its flagship Dayforce platform, secondary platform Powerpay targeting small businesses in Canada, and remaining legacy Bureau products such as tax services. The company benefits from high customer switching costs, allowing it to retain clients, upsell add-on modules, and earn a steady stream of recurring revenue at a low marginal cost, underpinning our narrow moat rating. Morningstar analysts expect Ceridian’s growing record of performance should help to attract new business, increase market share, and expand into new global markets. The shares currently screen as overvalued, trading at a 30% premium to our fair value estimate.

Ceridian has disrupted incumbent providers and taken share of the expansive and growing HCM market through the appeal of its agile, cloud-based solutions that offer an alternative to legacy on-premises solutions or solutions cobbled together using multiple databases or platforms. The company derives most of its revenue from Dayforce, which is geared to larger enterprises wishing to streamline complex human resources operations across multiple jurisdictions on a unified platform and leverage the platform’s scalable infrastructure. Dayforce offers real-time continuous payroll calculation and, as a natural extension, on-demand pay. Leveraging this functionality, Ceridian introduced Dayforce Wallet in 2020, which allows clients’ employees to load their net earned wages to a prepaid Mastercard, generating interchange fee revenue for Ceridian when purchases are made. While this innovation is being replicated by competitors, we expect it will create a promising new high-margin revenue stream for Ceridian that leverages the firm’s exposure to millions of employees and their earned wages.

Morningstar analysts estimate revenue to grow at an 18% compound annual rate over the five years to fiscal 2025, driven by mid-single digit industry growth, market share gains, and mid-single digit group revenue per client growth. As per Morningstar analyst perspective, 12% average annual growth in Dayforce recurring revenue per client due to an increasing skew to larger businesses and greater module uptake. This growth will be offset by low single-digit revenue growth per Powerpay client due to minimal price increases and modest module uptake. Across both platforms, Morningstar expects fierce competitive pressures to limit like-for-like pricing growth to low single digits. Over the same period,  expect operating margins to increase to about 14% from less than 1% in a COVID-19-affected 2020 and 9% in a pre-COVID 2019. We anticipate this uplift will be driven by operating leverage from increased scale and higher interest on client funds.

Ceridian has made a tactical shift to target larger businesses and move further upmarket into the large enterprise and global space. While this drives higher revenue per client and exposes the company to a larger pool of client funds, we expect fierce competitive pressures and powerful clients will lead to increased pricing pressure, limiting margin upside potential over the long run. Morningstar analysts assume Ceridian will achieve midcycle operating margins around 31% in 2030, which is comparable with our forecast for wide-moat Workday, which also targets large enterprises with its cloud-based HCM software. By comparison, morningstar analyst forecast wide-moat Paychex, which targets small and midsize clients with significantly lower bargaining power, will achieve mid cycle operating margins of 43%. Ceridian operates in a highly competitive market, and  expect it will need to maintain high levels of investment to ensure that the functionality of its product suite is comparable with peers’ and meets clients’ needs.

Company profile

Ceridian HCM provides payroll and human capital management solutions targeting clients with 100-100,000 employees. Following the 2012 acquisition of Dayforce, Ceridian pivoted away from its legacy on-premises Bureau business to become a cloud HCM provider. As of fiscal 2020, nearly 80% of group revenue was derived from the flagship Dayforce platform geared toward enterprise clients. The remaining revenue is about evenly split between cloud platform Powerpay, targeting small businesses in Canada, and legacy Bureau products.

(Source: Morningstar)

General Advice Warning

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

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Gentex’s Balance Sheet Gives the Firm Strength to Handle the Unexpected

Business Strategy and Outlook

Gentex manufactures auto-dimming rear- and side-view mirrors that use electrochromic technology. These mirrors automatically darken to eliminate headlight glare for drivers and have many other applications. With over 1,700 patents worldwide, some valid through 2044, and a dominant 94% market share, up from 77% in 2003, Gentex has a narrow economic moat it should be able to protect for a long time, in our opinion. 

The growth prospects for auto-dimming mirrors look strong. Gentex estimates that in 2018, about 31% of all cars had interior auto-dimming mirrors, and about 13% had at least one exterior auto-dimming mirror. Demand remains healthy with annual revenue growth often exceeding industry vehicle production growth. Growth will come from increased vehicle penetration as more original-equipment manufacturers make the safety benefit of auto-dimming technology available and as Gentex’s research leads to new, advanced-feature mirrors that ultimately become standard products.

Financial Strength

Gentex is in excellent financial shape, with no debt and $270 million of cash on its balance sheet at the end of third-quarter 2021. Cash and investments were about 28% of total assets at that time. The company has ample cash on hand to fund more R&D or a higher dividend if the board chooses. Total cash and investments was $481.6 million, or $2.03 per diluted share. Gentex has been paying a dividend since 2003. Gentex took on $275 million of debt for the HomeLink acquisition which it finished paying off in 2018. In October 2018, Gentex obtained a new $150 million unsecured credit facility that expires in October 2023. 

Gentex can request an additional $100 million on the credit limit under certain conditions. The investments mostly consist of short-term government obligations, blue-chip stocks, and mutual funds. As of March 2018, the company targets cash and investments of $525 million, down from its previous target of $700 million. Management will often just speak in loose terms and say it targets around $500 million.

Bulls Say’s 

  • Auto-dimming technology has applications to other parts of the car like headlights, as well as outside autos such as airplane windows. Although small now, markets outside the auto industry could prove to be very large businesses down the road. 
  • The company’s financial health is so strong that we think Gentex can survive any downturn in the U.S. easier than other auto suppliers can. 
  • Biometrics, surgical room utlraviolet lighting, and electronic toll payments could open up new revenue streams for the company.

Company Profile 

Gentex was founded in 1974 to produce smoke-detection equipment. The company sold its first glare-control interior mirror in 1982 and its first model using electrochromic technology in 1987. Automotive revenue is about 98% of total revenue, and the company is constantly developing new applications for the technology to remain on top. Sales from 2020 totaled about $1.7 billion with 38.2 million mirrors shipped. The company is based in Zeeland, Michigan. 

(Source: Morningstar)

General Advice Warning

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

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Technology Stocks

NetEase capitalizes on the industry shift toward mobile gaming and now focuses on innovation in it

Business Strategy and Outlook:

NetEase started as a Chinese Internet portal in the late 1990s but has now become the second-largest mobile game company in the world. The firm owns one of the most well-known massively multiplayer franchise in China—Fantasy Westward Journey. Over the past decade, NetEase has capitalized on the industry shift toward mobile gaming and now focuses on developing innovative, high-quality, and long-cycle games with a mobile-first approach.

Like its global gaming peers, NetEase maintains a high level of profitability (above 30% operating margin) for its gaming business, thanks to stable revenue from core titles and the steady development of new franchises. The firm is positioned to not only continue capitalizing on the success of Westward Journey titles, but to also keep diversifying its revenue into new franchises. While games will remain NetEase’s core cash flow driver, the firm’s investments in other areas (music streaming, online education, e-commerce) also offer long-term potential.

Financial Strength:

The fair value estimate of the stock is USD 139.00, which implies forward 2022 P/E of 32, below the above 40 times earnings multiples demanded by global peers like Take-Two and Electronic Arts.

NetEase has a rock-solid balance sheet. At the end of December 2020, the company had CNY 93 billion in cash, cash equivalents, short-term investments, and time deposits under current assets. There was also a restricted cash balance of CNY 3.1 billion under current assets. This compares with only CNY 19.5 billion of short-term debt. Thanks to its strong net cash position and strong operating cash flow that amounted to 137% of net income in 2020, the firm should have no problem funding its gaming business and innovative businesses. However, NetEase has returned capital to shareholders via dividends and has set quarterly dividends at 20%-30% of its anticipated net income after tax in each quarter starting in the second quarter of 2019.

Bulls Say:

  • NetEase’s expertise in asymmetric multiplayer (Identity V and Dead by Daylight) would allow it to capitalize on future opportunities in this genre. 
  • The firm has done an admirable job at organically expanding into Japan, and it is likely that it will be able to replicate same success in Europe and the U.S. 
  • NetEase Music could see stronger user growth now that Tencent Music was told to end its exclusive licensing agreements with music labels on anti-trust grounds.

Company Profile:

NetEase, which started on an Internet portal service in 1997, is a leading online services provider in China. Its key services include online/mobile games, cloud music, media, advertising, email, live streaming, online education, and e-commerce. The company develops and operates some of the China’s most popular PC client and mobile games, and it partners with global leading game developers, such as Blizzard Entertainment and Mojang (a Microsoft subsidiary).

(Source: Morningstar)

General Advice Warning

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

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NextDC benefits from industry megatrends

Business Strategy and outlook

NextDC is well-placed to benefit from industry megatrends, including the growing adoption of cloud computing, the Internet of Things, and artificial intelligence, leading to exponential growth in data creation. As per Morningstar analyst forecast NextDC will materially expand its capacity over our 10-year forecast period in order to meet growing demand for data center services. 

The COVID-19 pandemic has accelerated the digital transformation of many businesses and expedited demand for co-location data centers. Large numbers of employees have made the transition to remote working arrangements, leading to a greater reliance on digital technologies such as video conferencing and cloud-based platforms, and reducing the need to store servers at a centralized location. Beyond the COVID-19 pandemic, it is expected that remote working levels will remain elevated above pre-pandemic levels, resulting in continued demand for digital technologies and potentially less need for physical office space. This shift has increased demand for data centers and hybrid and multi cloud data storage solutions, which are supported by co-location data centers like NextDC. Hybrid solutions, which combine traditional infrastructure with cloud storage, can improve business outcomes through reduced latency and costs, increased security and resilience, and the flexibility to connect to multiple clouds based on business needs. These solutions provide greater flexibility and allow businesses to scale their data storage capacity based on workflow. 

As per Morningstar analyst, interconnection services are becoming increasingly important for NextDC as more businesses make the transition to hybrid cloud storage models. As of fiscal 2021, interconnection revenue contributed 8% of NextDC’s total recurring revenue and this will trend higher over time as its network ecosystem matures.

Financial Strength

NextDC is in sound financial health. The company raised AUD 862 million in fiscal 2020 via an institutional placement and share purchase plan. Proceeds from the equity raising will be used to fund the development of a third Sydney data center and further capacity expansion at its existing and new sites. Morningstar analyst forecast, gearing, measured as net debt/EBITDA, to deteriorate to above 3.6 times in fiscal 2023 as NextDC continues to invest heavily in portfolio expansion, before recovering from fiscal 2024 as capacity utilization improves. Morningstar analyst forecasted that NextDC will invest about AUD 4.0 billion during the 10 years to fiscal 2031 to grow total power capacity at a CAGR of 16%. It is also expected that NextDC will only consider paying dividends when it has accrued sufficient franking credits, otherwise the capital would be better spent on investments or repaying debt.

Bulls Say

  • NextDC is well placed to benefit from industry megatrends including the growing adoption of cloud computing, the Internet of Things and artificial intelligence leading, to exponential growth in data creation. 
  • The shift to cloud-based services increases the need for enterprises to connect to numerous cloud providers and the connection is fastest, safest and most efficient in a co-located data center. 
  • The COVID-19 pandemic has accelerated the digital transformation of many businesses and is leading to increased demand for cloud-based services.

Company Profile

NextDC is an Australia data center developer and operator with a focus on co-location and interconnection among enterprise and government customers, global cloud and information and communications technology, or ICT, providers, and telecommunication networks. NextDC provides physical space, cooling, power, and security services and offers optional technical and project management support. The company’s tenants house their servers within the data center and can connect to each other via physical and virtual connections.

 (Source: Morning Star)

General Advice Warning

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

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Sectors Technology Technology Stocks

SAP reported solid 2Q21 result with revenue of €6.7bn

Investment Thesis :

  • Leading market share positions in on-premise enterprise resources planning (ERP) and on-premise customer relationship management (CRM) markets with customers in over 180 countries and strong brand awareness. 
  • The market is undervaluing SAP’s CRM business (relative to its peer group such as Salesforce.com).
  • Support revenues and Cloud subscriptions provide recurring revenue, which gives SAP a defensive profile. 
  •  Competent management team. 
  •  Strong operating and free cash flow generation with attractive dividend policy (payout ratio of at least 40%)

Key Risks

  • The Slower take-up for HANA and S/4HANA. 
  • Deteriorating sentiment if the economy and IT spending weakens. 
  • Market share loss in software revenue driven by cloud migration. 
  •  Aggressive M&A with risk of overpaying. 
  • Additional opex spending dampening margin expansion. 
  •  Key-man risk due to management changes. 
  • Competition from other established players like Microsoft, Salesforce.com and Oracle

Key highlights of FY 2021

Ongoing momentum in the business saw management slightly raised the bottom end of their previous guidance, which may have disappointed the market (i.e. investors may have been expecting a bigger bump up). Management’s 2021 outlook (non-IFRS @ CC): Cloud Revenue €9.3 – 9.5bn (prev. €9.2 – 9.5bn), up +15-18%; Cloud and Software Revenue €23.6 – 24.0bn (prev. €23.4 – 23.8bn), up +2-3%; and Operating Profit €7.95 – 8.25bn (prev. €7.8 – 8.2bn), flat to -4%. Management reiterated their operating cash flow guidance of approx. €6.0bn and FCF above €4.5bn.

2Q21 results highlights : Relative to the pcp: 

  • Total group revenue of €6.7bn was up +3% (in CC terms), driven by Cloud up +17%, Software licenses and support down -2% (Software Licenses down -13%, Software Support up +1%), Cloud and Software up +5% and Services down -7%. SaaS/PaaS cloud revenue (excluding Intelligent Spend) was up+25% (CC). Software Licenses were down -13% (CC) as expected and were ahead of expectations. Current Cloud Backlog (CCB) was up +20% (CC terms) to €7.8bn, with SAP S/4HANA CCB up +48% to €1.1bn.
  • From a region perspective, Asia Pacific & Japan revenue was solid (Cloud up +23% in CC; Cloud & Software up +6% in CC) while Americas (Cloud up +12% in CC; Cloud & Software up +5% in CC) and EMEA (Cloud up +23% in CC; Cloud & Software up +5% in CC) also saw good growth. Operating profit of €1.9bn was down -2% on pcp, but up +3% in CC terms. Operating margins were down -30bps to 28.8%

Company Profile:

SAP SE (SAP) is a global software and service provider headquartered in Walldorf, Germany, operating through two segments: Applications, Technology & Services segment, and the SAP Business Network segment. The Applications, Technology & Services segment is engaged in the sale of software licenses, subscriptions to its cloud applications, and related services and the SAP Business Network segment includes its cloud-based collaborative business networks and services relating to the SAP Business Network (including cloud applications, professional services and education services). SAP is the market leader in enterprise application software and also the leading analytics and business intelligence company, with the Company reporting that more than 77% of all transaction revenue globally touches an SAP system.

(Source: Banyantree)

General Advice Warning

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

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Financial Markets Sectors Technology Technology Stocks

Alphabet Inc. earnings momentum to continue driven by Cloud Business and focus on AI and Machine Learning

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

Investment Thesis:

  • Commands a strong market position in online advertising and online eyeballs. 
  • Search advertising increasing its share of advertising spend. 
  • Leveraged to online video steaming and advertising via YouTube. 
  • Strong balance sheet with over US$130bn in cash, which gives flexibility to invest in growth options or undertake capital management initiatives. 
  • Focus on innovation across advertising businesses, which should help to sustain growth. 
  • Strong management team. 
  • Value accretive acquisitions in existing and new growth areas. 
  • Recent disclosure suggests GOOGL’s Cloud business building good revenue momentum.

Key Risks:

  • Threat of increased regulatory scrutiny, including concerns around consumer privacy and personal data.
  • Regulatory changes which impacts the way GOOGL does business (e.g. forced changes to products). 
  • Expenses such as TAC (traffic acquisition costs) increase ahead of expectations and which the company is unable to pass onto customers. 
  • Deterioration in economic conditions, which would put pressure on the advertising revenue. 
  • Competition from companies like Facebook Inc., Amazon etc. could put pressure on margins. 
  • Potential return from investment on new, innovative technology fails to yield adequate results.

Key highlights:

  • GOOGL reported a very strong quarter, with revenues of $61.9bn up +61.6% (or up +57% in constant currency).
  • Total Google Services revenues of $57.1bn was up +63%, with Google Search & Other up +68.1% (led by strong growth in retail), YouTube ads up +83.7% (driven by brand and direct response) and Google advertising up +60.4% (driven by Ad Manager and AdMob)
  • Google Cloud revenue was up +53.9% to $4.6bn, driven by growth in infrastructure and platform services. GOOGL’s total cost of revenues of $26.2bn was up +41%, driven by growth in TAC (traffic acquisition costs), which was up +63% to $10.9bn. Group operating income was up +203.3% to $19.4bn (with margin expanding to 31.3% from 16.7% in pcp), driven predominantly by Google Services (up +134.2% to $22.3bn).
  • GOOGL continues to spit out significant amount of cash from operations, reporting free cash flow of $16.4bn in 2Q21 and $58.5bn over the trailing 12 months.
  • At the end of the quarter, the balance sheet had $136bn cash (& equivalent). The Board has amended the existing $50bn stock repurchase program to permit the repurchase of both Class A and Class C shares.

Company Description: 

Alphabet Inc is headquartered in Mountain View, California, and provides online advertising services across the globe. It offers performance and brand advertising services through Google and Other Bets segments. The Google segment offers products, such as Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, Hardware, Search, and YouTube, as well as technical infrastructure. This segment also offers digital content, cloud services, hardware devices, and other miscellaneous products and services. The Other Bets segment includes businesses, including Access, Calico, CapitalG, GV, Verily, Waymo, and X, as well as Internet and television services.

(Source: Banyantree)

General Advice Warning

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

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Technology Stocks

Omicron Buoys Sonic Healthcare Coronavirus Testing but Our Long-Term View Stands

Business Strategy and Outlook

Sonic’s “medical leadership” model recognises the importance of the referring doctor as the company seeks to differentiate itself on service levels. Success in the model is evidenced by organic growth consistently tracking ahead of the market, suggesting market share gains. Sonic’s organic volume growth in its core laboratories segment has typically ranged between 3% and 4% and we forecast a similar rate over our 10-year forecast period. The volume growth is underpinned by population growth, aging demographics in developed markets, higher incidence of diseases and wider adoption of preventative diagnostics to manage healthcare costs.

Laboratory medicine, or pathology, has a high fixed cost of operation and thus benefits from volume growth to drive lower cost per test outcomes. Sonic benefits from cost efficiencies by maximising throughput through its network of labs and collection centres. Higher testing volumes result in a lower cost per test as labour, equipment, leases, transportation and overhead costs are all leveraged.

Financial Strength

Sonic is in a strong financial position. Free cash flow conversion of earnings prior to acquisition spend has averaged 98% over the last 10 years and has allowed Sonic to quickly repay the debt funding its acquisitions. At the end of fiscal 2021, Sonic reported AUD 921 million in net debt representing net debt/EBITDA of only 0.4 times, below the 2.0 to 2.7 times range targeted by management, and well below the 3.5 times covenant. Sonic also has a progressive dividend policy which is communicated as a minimum of an equal dividend per share to the prior year.

Our AUD 33 fair value estimate factors in 4% group revenue growth in a typical year and a midcycle operating margin of 14%. It is estimated that the deliver EPS growth of roughly 5% in a typical year. Partly offsetting this was the Australian government cutting the reimbursement rate for private providers to AUD 72.25 per test from AUD 85 prior, which is in place until June 30, 2022. The deal broadens Sonic’s existing U.S. footprint by instantly adding annualised revenue of roughly USD 110 million, or 7% of Sonic’s fiscal 2021 U.S. laboratory revenue.

Bulls Say’s 

  • Sonic boasts leading market positions in most of its geographies and benefits from cost advantage derived from scale. 
  • Pathology and diagnostic imaging are highly defensive industries that influence the majority of treatment decisions. 
  • Free cash flow conversion prior to acquisition spend has averaged 98% of earnings over the preceding 10 years and forecast to remain high, allowing Sonic ample flexibility to reinvest in the business.

Company Profile 

Sonic Healthcare is a global pathology provider. It is the largest private operator in Australia, Germany, Switzerland and the U.K., the second largest in Belgium and New Zealand and the third largest in the U.S. In addition to pathology, which contributes roughly 85% of group revenue, Sonic is the second largest player in diagnostic imaging in Australia and the largest operator of medical centres in Australia. The company typically earns about 40% of group revenue in Australia and New Zealand, 25% in the U.S. and 35% in Europe

(Source: Morningstar)

General Advice Warning

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

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Technology Stocks

Adobe’s ARR Slip-Up and Light Guidance for 2022 Leave Shares Attractive; FVE Up to $630

Business Strategy and Outlook

Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions, both now part of the broader Creative Cloud, which is now offered via a subscription model. The company has added new products and features to the suite through organic development and bolt-on acquisitions to drive the most comprehensive portfolio of tools used in print, digital, and video content creation The benefits from software as a service are well known in that it offers significantly improved revenue visibility and the elimination of piracy for the company, and a much lower cost hurdle to overcome and a solution that is regularly updated with new features for users.

Adobe benefits from the natural cross-selling opportunity from Creative Cloud to the business and operational aspects of marketing and advertising. It is expected that Adobe will continue to focus its M&A efforts on the digital experience segment and other emerging areas. Adobe believes it is attacking an addressable market greater than $205 billion. The company is introducing and leveraging features across its various cloud offerings (like Sensei artificial intelligence) to drive a more cohesive experience, win new clients, upsell users to higher price point solutions, and cross sell digital media offerings.

Adobe’s ARR Slip-Up and Light Guidance for 2022 Leave Shares Attractive; FVE Up to $630

Adobe reported mixed fourth-quarter results, including revenue upside, messy billings, modest EPS upside, and light guidance. However, Morningstar analyst believe the outlook is better than it appears. After all, the 2022 outlook is just 1% below FactSet consensus, with pressure driven by having one less week than 2021 and foreign exchange combining to add a 300 basis point headwind to growth. After factoring guidance and results along with rolling with DCF forward,  analyst of Morningstar have raised fair value estimate to $630 per share from $610. 

Financial Strength 

Adobe enjoys a position of excellent financial strength arising from its strong balance sheet, growing revenues, and high and expanding margins. As of November 2021, Adobe has $5.8 billion in cash and equivalents, offset by $4.1 billion in debt, resulting in a net cash position of $1.6 billion. Adobe has historically generated strong operating margins. Free cash flow generation was $6.9 billion in fiscal 2021, representing a free cash flow margin of 43.7%.Morningstar analyst believes that margins should continue to grind higher over time as the digital experience segment scales. In terms of capital deployment, Adobe reinvests for growth, repurchases shares, and makes acquisitions. The company does not pay a dividend. Over the last three years Adobe has spent $2.8 billion on acquisitions, $9.6 billion on buy-backs, while share count has decreased by 15 million shares. Morningstar analyst believes that the company will continue to repurchase shares as its primary means of returning cash to shareholders over the medium term and will continue to make opportunistic and strategic tuck-in acquisitions.

Bulls Say 

  • Adobe is the de facto standard in content creation software and PDF file editing, categories the company created and still dominates. 
  • Shift to subscriptions eliminates piracy and makes revenue recurring, while removing the high up-front price for customers. Growth has accelerated and margins are expanding from the initial conversion inflection. 
  • Adobe is extending its empire in the creative world from content creation to marketing services more broadly through the expansion of its digital experience segment. This segment should drive growth in the coming years.

Company Profile

Adobe provides content creation, document management, and digital marketing and advertising software and services to creative professionals and marketers for creating, managing, delivering, measuring, optimizing and engaging with compelling content multiple operating systems, devices and media. The company operates with three segments: digital media content creation, digital experience for marketing solutions, and publishing for legacy products (less than 5% of revenue).

 (Source: Morningstar)

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