Category: Uncategorized

Business Strategy & Outlook

Group 1’s restructurings during the financial crisis, such as new dealer and customer systems, have paid off. A common operating metric in the dealer sector is selling, general, and administrative expenses as a percentage of gross profit; Group 1’s ratio improved to 60.3% including rent expense in 2021 compared with 77.9% in 2007, and management expects it to remain below 70%. The company in 2018 began transforming itself with its Val-U-Line used-vehicle strategy and scheduling accommodations for service technicians, which are improving employee retention and increasing technician headcount. Val-U-Line comes from Group 1 wisely, wanting to retail more used vehicles rather than send them off to auction, because the former is more profitable. Val-U-Line only sells high-mileage used vehicles, and the brand is not a stand-alone used-vehicle store like three other public dealers are doing. The AcceleRide omni channel platform should keep the firm competitive with new entrants to the online used-vehicle market such as Carvana but is also for new vehicles, service, and buying vehicles from consumers. Digital will enable much better SG&A leverage than the company has had in the past and increase used-vehicle sales.

Most growth will come via acquisition because Group 1’s model is similar to that of the other large dealerships, which have been consolidating stores. The industry is consolidating because smaller players cannot compete with the scale and cost savings achieved through roll-up acquisitions pursued by the largest franchise dealerships. The industry is still highly fragmented, so Group 1 will not have a problem finding desirable stores to buy. Most deals to be in the U.S. Parts and servicing was about 12% of 2021 revenue but made up 36% of gross profit. This significant contribution to profitability is less volatile than vehicle sales and mitigates some of the cyclical risk of the auto industry. Vehicles are becoming more complex to repair, which favors the dealer that can more easily invest in service operations. Financing also helps profits with 100% gross margin from commission.

Financial Strengths

In the third quarter of 2014, Group 1 retired all of its convertible bonds outstanding. The firm funded the convertible retirement with $550 million of new 5.00% senior unsecured notes due in June 2022. These 2022 notes were retired in September 2020 and replaced with $550 million of 4% notes due in 2028. The firm issued another $200 million of the 2028 notes in 2021 to help fund the Prime acquisition. Group 1 redeemed all $300 million of its 5.25% 2023 notes in April 2020 via cash on hand and credit line borrowing. Group 1 has about $790 million in liquidity from cash and capacity on its credit lines and no bond debt due until 2028. Availability on credit lines excluding floor plan at the end of September was about $550 million. Group 1 reinstated its dividend in 2010 and had been repurchasing shares, but COVID-19 led to the suspension of the dividend and the end of buybacks. In October 2020, the company announced the resumption of the dividend, and it recently bought back over 20% of its stock. In March 2022, Group 1 amended its credit facility to expire in March 2027. The facility has $1.65 billion for U.S. inventory floorplan financing and another $349 million for working capital, acquisitions, or general corporate purposes. The $349 million can be expanded to $500 million and up to $150 million can be in euros or pounds. The credit facilities are secured by essentially all of the company’s domestic personal property. The facilities also contain financial covenants including a fixed-charge coverage test and total leverage test. The total adjusted leverage covenant is less than 5.5 times and was 1.8 times at Sept. 30. The fixed-charge coverage covenant is greater than 1.20 times and was 6.1 times at the end of 2021. Group 1 had $800 million of mortgage debt at Sept. 30 and owned 66% of its real estate, up from 36% in 2011. Group 1 can continue to maintain a reasonably healthy balance sheet and fund more deals as needed.

Bulls Say

• Auto dealerships are stable, profitable businesses with a diversified stream of earnings beyond selling new vehicles.
• Parts and service revenue should continue to be lucrative over time because most manufacturers require warranty work to be done at the dealership, and large dealers can more easily afford the technology and training needed to service increasingly complex vehicles. Parts and service provide a large portion of gross profit, despite being a small part of overall revenue.
• If successful, AcceleRide and Val-U-Line could prove good future sources of profit.

Company Description

Excluding its Brazil operations about to be sold, Group 1 owns and operates 46 collision centers and 201 automotive dealerships in the U.S. and the U.K., offering 34 brands of automobiles altogether–nearly 150 of the stores are in the U.S. with American locations mostly in metropolitan areas in 17 states in the Northeast, Southeast, Midwest, and in California. Texas alone contributed 40% of new vehicle unit volume in 2021 excluding Brazil and the U.K. about 19%. Texas, Oklahoma, and Massachusetts combined were about 55%. Revenue in 2021 totaled $13.5 billion. The company was founded in 1995 and is based in Houston.

(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.

Business Strategy & Outlook

With a long history of manufacturing experience, Harley-Davidson has brand strength and a dealer network that give the firm a wide economic moat and dominant position in the U.S. motorcycle market. However, there are no switching costs to protect Harley’s brand when consumers replace their bikes, and the premium price Harley commands relative to its peers has proven problematic during cyclical downturns and periods of competitive pricing, hindering Harley’s retail sales and shipments. In 2020, as a result of temporary factory shutdowns and dealer closures (as well as the pushback of product launches until spring 2021), Harley ceded massive market share. While still a significant market player, Harley’s market share fell roughly 800 basis points, to 42.1% in 2020 from above 50% in 2019. Thankfully, it recovered 3% of share in 2021, a gain that it should maintain with the introduction of new products. To monitor Harley’s market share position to help determine whether Harley’s wide moat rating deserves to stay intact. On a positive note, COVID-19 gave Harley the chance to reset its long-term strategy and focus efforts back on its core consumer, one which holds the key to higher profit margins ahead.

 With its “The Hardwire” strategy, CEO Jochen Zeitz is set on chasing high ROI opportunities for Harley. The firm is focused on selectively expanding into new channels (for example, with the launch of Pan America), reading consumer preferences (growing into EV), better managing complementary businesses (like high-margin parts and accessories and merchandise), and improving customer experience (to elevate awareness and engagement). Moreover, with the EV line set to be liberated from the business (combining with a SPAC in the back half of 2022), a focus on capitalizing on electric trends should accelerate the production and adoption of such units. In fact, Harley expects to ship more than 100,000 electric units in 2026, representing roughly one third of output. While electric units provide volume growth, the Harley will fall short of its unit target.

Financial Strengths

Harley-Davidson carries more debt on its balance sheet than leverage is required to finance its HDFS arm and offer loans to customers. HDFS generates increased financial risk and weaker profitability when credit standards tighten or credit markets become less liquid. The firm had $2.2 billion in cash and equivalents at the end of June 2022; it has historically strived to hold enough liquid assets to cover its liquidity needs for 12 months. This is a sensible strategy, given the inherent risk in the business model due to HDFS. At the beginning of COVID-19, Harley completed a number of capital market transactions, including asset-backed security issuances, both a euro- and dollar-denominated medium-term note (May and June 2020), and the addition of access to incremental capital via credit facilities (outlined below), indicating the firm can still tap sources of cash. The firm does have a defined-benefit pension program, and weak return performance of its portfolio could become a problem if it needs to make sizable contributions to it. When accounting rules changed, both the assets and liabilities of its formerly unconsolidated qualifying special-purpose entities had to be consolidated. Before 2008, debt/total capital was less than 50%. However, with the consolidation of securitization interests, that ratio jumped to 73% in 2009. The company worked this down to 64% at the end of 2013, but the ratio has risen again above 75% since 2015 with the issuance of incremental debt. The company still has financial flexibility thanks to a $707.5 million revolver (expiring in 2023), and a second $707.5 million revolver (expiring in 2025), which helps address the seasonality of production and shipments. Additionally, Harley maintains flexibility in its capital structure through stock repurchases and dividends (currently at $0.1575 per share per quarter).

Bulls Say

• Harley-Davidson’s brand is nearly 120 years old and resonates globally with a wide consumer base, particularly its core market (men over 35). Efforts to reconnect with its core consumer could lead to a unit demand uptick faster than one anticipated. 
• The firm has historically generated strong free cash flow, and continued doing so after the pandemic, generating a high-single-digit average FCF yield over the next decade. 
• Harley has high brand awareness and robust market share in custom and touring segments domestically, two of the most profitable motorcycle categories.

Company Description

Harley-Davidson is a global leading manufacturer of heavyweight motorcycles, merchandise, parts, and accessories. It sells custom, cruiser, and touring motorcycles and offers a complete line of Harley-Davidson motorcycle parts, accessories, riding gear, and apparel, as well as merchandise. Harley-Davidson Financial Services provides wholesale financing to dealers and retail financing and insurance brokerage services to customers. Harley has historically captured about half of all heavyweight domestic retail motorcycle registrations, a metric it had ceded in 2020 as it repositioned the business, but a level it is working back toward. In recent years the firm has expanded into the adventure touring market with its Pan America model and into electric with the LiveWire brand.

(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.

Business Strategy and Outlook

Atlas Arteria is a global toll-road group with, effectively, two assets. By far its most valuable asset is a 31% stake in Autoroutes Paris-Rhin-Rhone. Despite APRR’s dominant motorway network in eastern France, the short concession life, high base capital expenditure requirements and subdued organic growth make it less attractive than some motorways. Nonetheless, lower interest and tax rates should support growth in APRR’s earnings and distributions in the medium term. Longer term distribution growth is likely to be held back by the eventual normalisation of interest rates and, from the mid-2020s, the need to pay off all debt at APRR before handing the motorway concession back to the government in 2035. After the APRR concession ends, Atlas Arteria’s distributions will fall by two thirds to a level supported by the smaller Dulles Greenway. 

APRR is one of the largest tolled motorway groups in Europe. Concessions covering its main network end on Nov. 30, 2035, and on the smaller AREA network on Sept. 30, 2036. These concessions are relatively short compared with those for other listed toll-road operators. When the concessions end, the roads are returned to the government for no consideration and after repaying all debt. The APRR concessions set base toll increases at 70% of the consumer price index, or CPI, excluding tobacco, and set a base level of maintenance and upgrade capital expenditure of about EUR 200 million per year. 

Atlas Arteria’s other main asset is the wholly owned Dulles Greenway in Virginia, a 22-kilometre toll road connecting Leesburg with Washington Dulles International Airport. Along with high debt levels, the main issue for Greenway was falling traffic volumes following the global financial crisis and as competing roads have been upgraded. After failing debt service coverage tests in recent years, Greenway is not allowed to pay distributions to investors. There can be no value attributed to Atlas Arteria’s other assets, which are small and have extremely high financial leverage.

Financial Strength

Atlas Arteria is in sound financial health. Net debt/EBITDA for APRR, including holding company debt, was 3.5 times at December 2021 and it is alleged to be lower to 3.0 in 2022. Thereafter, financial leverage is forecast to fall to relatively conservative levels as EBITDA recovers from coronavirus lockdowns. It is foreseen, margin expansion going forward, underpinned by projected toll increases and traffic volumes, while operating costs are likely to be well-contained. The main debt covenant limit is net debt/EBITDA of 7.0 times. This should prove adequate headroom, unless the coronavirus impact is significantly worse than expected. Interest rates on more than 80% of debt are fixed or hedged for life. We estimate the APRR Group has a weighted average debt maturity of around six years. This fairly long debt maturity profile reduces refinancing risk. Atlas Arteria’s other assets have aggressive financial leverage, but all debt is nonrecourse, which limits risk. The best of Atlas’s remaining assets is Dulles Greenway, which had net debt/EBITDA of 19 times in December 2021. While leverage is very high, it probably won’t prove fatal thanks to the road’s very long term, fixed rate debt, which means the company has no refinancing requirements and no interest-rate risk. Nonetheless it is unable to pay dividends to Atlas until debt service coverage (EBITDA/total debt service) improves. Debt service coverage was 0.85 times in December 2021, well below the 1.25 times threshold required to reinstate dividends. As coverage fell below 1.15 times, the road is barred from paying dividends for a minimum of three years. With poor traffic volumes following coronavirus lockdowns and upgrades to competing roads, Greenway’s debt service coverage is unlikely to improve to the point that it can start paying dividends until at least 2025.

Bulls Say’s

• It is projected for distributions to investors grow strongly during the next several years as interest and tax rates at APRR fall. 
• APRR is a good quality asset. Revenue is defensive and earnings have a positive long term outlook. Dulles Greenway adds longer-term value. 
• Toll roads are in high demand from pension funds and other large investors searching for yield. The two best roads could potentially be sold for high prices.

Company Profile 

Atlas Arteria is a global toll-road investor created out of the reorganisation of Macquarie Infrastructure Group in 2010. The firm’s main asset is a 31.1% stake in Autoroutes Paris-Rhin-Rhone, or APRR. APRR owns concessions to toll more than 2,300 kilometres of motorways in eastern France, most ending late 2035. The firm also wholly owns the Dulles Greenway toll road in the U.S. 

(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.

Business Strategy & Outlook:

Networks will account for about 60% of Naturgy’s operating profit by 2026. Around two thirds of networks’ EBIT come from Spain. Naturgy is the global leader in Spanish gas distribution, where it has consistently achieved high profitability and returns leading the regulator to impose a sharp remuneration cut in 2021. Networks’ regulated returns are higher in Latin America although high inflation and local currencies’ declines have been a drag on returns in recent years. Naturgy is one of the largest gas utilities in Europe. Profitability of its liquid natural gas, or LNG, business should be boosted by skyrocketing gas prices in Europe in 2022 and 2023. However, the firm intends to eventually downsize the business because of high earnings volatility. Naturgy massively stepped up its renewable’s ambitions in 2021, aiming to to increase its capacity from 4.60 GW in 2020 to 14 GW in 2025. Accordingly, renewables should be the main earnings growth driver. However, there is some execution risk; the group being a laggard in a competitive sector. 

Naturgy ended its aggressive dividend policy set in 2018. The group will pay an annual dividend of EUR 1.20 per share over 2021-25 with a potential reassessment in 2023. This implies an 76% average 2021-25 payout, below the unsustainable 120% over 2018-22. In 2021, Australian fund IFM made a public offer to acquire a 22.7% stake in Naturgy at EUR 22.07 per share. IFM managed to to buy only 10.8% of the shares. However, IFM continued to buy shares on the market since October, reaching 13.4% of the capital in March 2022 and implying limited free float of 14.5%, fuelling speculation of a delisting. In February 2022, Naturgy unveiled a plan to split its liberalized and regulated businesses into two independent listed entities by year-end. The group argued the split will be value-accretive and increase growth potential through higher flexibility of the liberalized entity and lower cost of capital for the regulated one. While increasing interest rates hit the value of renewables projects, they imply higher future returns of regulated networks, meaning keeping a integrated model provides some hedge.

Financial Strengths:

The group’s net debt is supposed to increase from EUR 12.8 billion in 2021 to EUR 15 billion in 2026 on the acceleration of renewables investments. The dividend will have to stand at EUR 1.20 until 2024 before increasing to EUR 1.23 in 2025 and EUR 1.25 in 2026 involving an average payout ratio of 76%. 

Net debt/EBITDA to increase from 2.7 times in 2021 to 3.1 in 2026 as the net debt expansion will be not be offset by the EBITDA increase. Net debt/EBITDA will average 3 through 2026. The project EBIT/net interest expense to average 5.4 between 2021 and 2026, a healthy level. The forecasted net debt/equity to average 1.5 through 2026 versus 1.45 in 2021.

Bulls Say:

• Rebalancing of the capital allocation from shareholder remuneration to growth investments will be value- accretive.
• Limited free float implies a high likelihood of minorities buyout.
• Profitability of the LNG business should boom in 2022 and 2023 on skyrocketing gas prices.

Company Description:

Naturgy stems from the acquisition of Union Fenosa in 2008. The company operates across the gas value chain, from procurement to distribution and marketing. It owns and operates the largest gas distribution network in Spain and is the leader in retail gas supply. The company also owns and operates gas and electricity distribution networks in Latin America. The company owns 12.60 GW of generation capacity including 4.60 GW of renewables, mostly made of hydro.

(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.

As a producer of commodities, Origin is a price-taker and has few competitive advantages over peers. Capital and efficient scale are potential barriers to competition, but they’re not strong enough to justify an economic moat. 

Origin’s domestic energy retailing business grew quickly during the past decade, but strong acquisition-driven growth is unlikely to reoccur, with earnings growth largely dependent on Australia Pacific LNG. Acquisitions of government-owned energy assets were previously a key growth driver, but all state-owned retailers are now privatised. Origin, Energy Australia, and AGL Energy collectively control 80% of the market, and the Australian market regulator is unlikely to allow further consolidation among the majors. Future growth depends on energy demand growth, which is likely to remain modest. Domestic energy retailing is Origin’s core business and the cash cow that funds growth projects. Its relatively low-risk attributes are in stark contrast to APLNG. 

Financial Strength:

The fair value estimate of AUD 6.50 per share implies a P/E of 19 times for fiscal 2022, and an enterprise value/EBITDA of 7.5 times, including Origin’s share of APLNG earnings.

Origin is in sound financial health following the APLNG selldown, which netted AUD 2 billion in proceeds. Net debt/EBITDA (including cash distributions from APLNG) was 2.9 times in June 2021, at the top of management’s target range of 2.0-3.0 times. Credit metrics were likely to deteriorate further given the formidable earnings headwinds in the utility business, but the APLNG selldown has strengthened the balance sheet and alleviated the risk of an equity raising. Earnings from the energy retailing business are falling because of weak wholesale electricity prices but are likely to recover from fiscal 2023. Strong oil and LNG prices and a conservative dividend policy should help credit metrics further improve.

Bulls Say:

• The Australia Pacific LNG project is the largest coal seam gas to LNG project in Australia and could significantly increase earnings if oil prices strengthen. 
• Origin’s energy retail business is the market leader and should benefit from cost-saving initiatives. 
• Origin’s cash flow base is diversified, and the company is less susceptible to the vagaries of the market than a non-integrated energy provider.

Company Profile:

Origin Energy is a major vertically integrated Australian energy utility. Its energy retailing business is the largest in Australia, with about 4 million customers and a 33% market share. Its portfolio of base-load, intermediate, and peaking electricity plants is one of the largest in the national electricity market, with a capacity of 6,000 megawatts. Origin also operates and owns 37.5% of Australia Pacific LNG, which owns large coal seam gas fields and LNG export facilities in Queensland.

(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.

VMware has the right products and strategy to lock customers into its ecosystem as organizations look for a simpler transition to the cloud, the ability to develop and manage applications in a secure manner across any cloud location, and choose a neutral vendor to get the best of every public cloud, private cloud, on-premises, and edge location.

VMware is hitting the pedal on its subscription and SaaS journey, expecting fiscal 2024 to be an inflection year in subs and SaaS, that should drive at least 10% annual growth for fiscal 2025. While expectations for fiscal 2023 will be coming on the next quarterly call, we believe VMware is positioned to achieve these longer-term targets as more of its core portfolio transitions from licenses to subs and SaaS to buoy growth coming from native subs and SaaS offerings, and the company gains leverage as these solutions scale.

As part of the spin-off from Dell, VMware’s special dividend to all shareholders will be $11.5 billion while retaining an investment grade credit rating. VMware also announced a newly authorized $2 billion share repurchase program that runs through fiscal 2024. While we expect most of VMware’s cash flow to go toward paying down debt taken on in conjunction with the Dell spin-off in the immediate term, we positively view the decision to authorize a new repurchase program

As part of its VMworld virtual conference, VMware showcased new releases that centered around its strategic areas of being the simple path of developing, deploying, and managing applications and IT infrastructure across multi and hybrid-cloud environments. We believe the announcements are aligned with VMware’s strategy of lowering complexities associated with moving applications to the cloud and ensuring organizations have the flexibility of moving between various cloud, on-premises, and edge locations in a simplistic fashion. In our view, VMware is uniquely positioned in a hybrid- and multi-cloud world, where enterprises want to have flexibility on their cloud choice but need a conduit to freely move between locations. We expect VMware’s bread-and-butter vSphere solution now being offered as cloud managed and via subscription could be the strong catalyst in migrating customers to subs and SaaS, as well as being a strong up and cross-selling component for the cloud strategy. 

Additionally, we were excited to see further announcements around cybersecurity and edge networks. VMware has over 30,000 security customers, and we believe the push to showcase zero trust security, whereby nothing is implicitly given trust, is the correct decision. In our view, VMware’s security opportunity is underappreciated as it spans from the data center with endpoint protection and micro segmentation to the remote worker’s computer and phone. Combined with device visibility via its end user compute portfolio, we believe VMware is becoming a larger participant in the security market, and that IT infrastructure organizations will start increasingly adopting VMware’s products for zero trust environments. For edge, we expect a proliferation of applications and workloads being requested and generated closer to the end user and believe that VMware’s solutions for software-defined wide area networking and telco cloud will be sought after to enable these connections with centralized control.

 (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.

Broadridge’s regulated proxy and interim business is its crown jewel, and a disproportionate amount of the firm’s net income comes from its fiscal third and fourth quarter during proxy season. In addition, Broadridge generates about 30% of its fee revenue and profit from its global technology and operations or GTO segment, which provides securities processing solutions. Operationally, Broadridge entered into an IT-services agreement with IBM in 2010 to increase efficiency. Expanding on its mailing, data security, and processing capabilities, Broadridge has completed numerous acquisitions.

Since 2010, Broadridge has completed at least 25 acquisitions. Notable acquisitions include DST’s North American customer communications business for $410 million in 2016 and RPM Technologies for $300 million in 2019. The NACC business provides print and digital communication solutions, content management, postal optimization, and fulfillment to a variety of sectors, including financial-services firms, utilities, and healthcare firms.

RPM Technologies provides enterprise wealth management software solutions and services. In March 2021, Broadridge announced it would acquire Itiviti, a provider of order and execution management trading software and order routingnetworking and connectivity solutions, for $2.5 billion. During its December 2020 investor day, Broadridge laid out its three-year per year goals including recurring revenue growth of 7%-9% (organic: 5%-7%), adjusted operating margin expansion of 50 basis points, and adjusted EPS growth of 8%-12%.

Financial Strength

Broadridge’s financial health is sound, in our view. As of June 30, 2020, Broadridge had long-term debt of approximately $1.8 billion. Broadridge’s adjused net leverage ratio was 1.6 times EBITDAR and its gross leverage ratio was 2.0 times EBITDAR. Of the $3.2 billion in fee revenue that Broadridge generated in fiscal 2020, over 90% was classified as recurring. Also, during the last financial crisis, equity proxy position count was flat to slightly negative and mutual fund/ETF positions grew.

Given the stability of Broadridge’s business and the modest leverage, we believe Broadridge’s debt load is very manageable and that it could increase its debt for M&A if it wanted to, like it will for its acquisition of Itiviti. The acquisition is expected to add about $2.55 billion in a term credit facility. Broadridge expects a gross leverage ratio of about 3.6 times at closing, and then expects to deleverage to its updated 2.5 times target over the following two years.

Bulls Say’s

Broadridge has a dominant market share position on delivering proxies and interims to beneficial shareholders.
During the financial crisis, Broadridge’s equity position count was down only 2% in 2009, indicating that its business model is close to recession-proof.
Broadridge’s investor communication solutions and global technology and operations businesses are sticky, with retention rates near 98%.

Company Profile

Broadridge, which was spun off from ADP in 2007, is a leading provider of investor communications and technology-driven solutions to banks, broker/dealers, asset managers, wealth managers, and corporate issuers. Broadridge is composed of two segments: investor communication solutions and global technology and operations.

(Source: Morningstar)
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