Investment Thesis
- By considering the quality of the business, EQIX is trading at fair valuation (from the perspective of trading multiples, dividend yield and the DCF valuation).
- Attractive long-term outlook in global digitization and data requirements of companies, with 5G and cloud computing as key drivers.
- Businesses moving away from on-premise centers towards colocation and cloud networks.
- Diversified client base and revenue stream minimizes contractual risk.
- Opportunity for future market share expansion via potential acquisitions.
Key Risks
- Increases to operating expenses – particularly electricity costs. However, the contracts between Equinix and its customers provide for rights and protection clauses to permit the Company to pass on electricity cost increases that exceed 5%.
- Rising technology and acceptance of cloud-based services may incentivise businesses to fully leverage cloud infrastructure rather than connecting with IBX data centers. However, management has downplayed these concerns, stating that there must still be direct interconnection between Cloud and businesses within the data centers.
- Newer IBX data centers have twice the cooling needs as old centers. Potential power limitations could force the company to have a lower utilization rate of its cabinets.
- Increased competition in the industry from the likes of Google, Apple, Microsoft and Digital Realty Trust, and the possibility of formation of strong strategic alliances amongst competitors
- EQIX is subject to exchange rate risk due to the company’s diverse geographical scale of operations. However, the company hedges many of these exposures.
- REIT classification mandates a minimum of 90% of taxable income paid to shareholders. This may hinder EQIX’s ability to increase its cash via retained earnings and could render the company’s balance sheet inflexible.
Key Highlights
- For FY22 total revenues of $7.259-7.299bn, up +9-10% y/y (+10-11% normalized and in CC), an increase of $65m vs prior guidance offset by a $102m FX impact, adjusted EBITDA of $3.323-3.353bn with margin of 46%, an increase of $33mvs prior guidance excluding integration costs ($30m integration costs) offset by a $49m FX impact, AFFO of $2.636-2.666bn, up +8-9% y/y (+8-10% normalized and in CC) and an increase of $33m vs prior guidance offset by a $42m FX impact, AFFO per share of $28.77-29.10, up +6-7% y/y (+8-9% normalized and in CC), total capex of $2.313-2.563bn with recurring capex of $180-190m, and cash dividend of $1,132m (up +10% y/y) equating to DPS of $12.4 (up +8% y/y).
- For 3Q22 revenues of $1.827-1.847bn, up +1-2% qoq, adjusted EBITDA of $831-851m, and recurring capex of $42-52m.
- Revenue increased +10% y/y to $1.817bn (vs guidance of $1.809-1.829bn), with America is up +11% y/y (+9% normalized in CC), EMEA up +11% y/y (and in normalized CC) and APAC up +5% y/y (+11% normalized in CC).
- Adjusted EBITDA increased +8% y/y to $860m (vs guidance of $828-848m) with margin of 47.3%, with Americas growing +15% y/y (+14% normalized in CC) with margin of 45.3% (up +190bps y/y), EMEA growing +13% y/y (+12% normalized in CC) with margin of 49.3% (up +50bps y/y), while APAC declined -10% y/y (-5% normalized in CC) with margin of 48.8% (down -770bps y/y).
- Net Income increased +217% y/y to $216m, primarily due to strong operating performance and a favorable tax settlement and AFFO increased +9% y/y to $691m.
- Capex was $495m (~55% of expansion cabinets in metros that generate >$100m of annual revenues), including recurring capex of $35, down -23% y/y and at lower end of guidance range of $33-43m.
Company Description
Equinix is a leading company in internet connection and data centers. It is the global market leader in the colocation data center industry, providing data services and platforms for over 9800 companies across 24 countries. This allows companies to connect to their online ecosystem and meet their interconnection needs for their business operations. EQIX also offers additional solutions such as the Equinix Cloud Exchange Fabric to connect data centers to cloud networks, and the recently introduced Equinix SmartKey to offer encryption protection for the data security management of companies.
(Source: Banyantree)
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.
Investment Thesis
- Trades on multiples which are susceptible to de-rating should growth rates miss expectations.
- An increase and escalation of intense competition by rivals such as Walt Disney (Disney+) and Apple Inc (Apple TV+).
- NFLX is transitioning from solely content distribution to content creation which presents execution risk.
- Significant existing user base, which is continuing to grow strongly, particularly in the international market.
- Competitive positioning globally, as a market leader not only in the industry but starting to carve a leading position against cable television.
- International expansion opportunities across emerging markets as well as solidified position in established markets (US).
- Exclusive contracts with best producers including Sony Entertainment, Warner Bros and Universal Pictures.
- Growing demand for Netflix exclusives.
- Flexibility to pick up content driven away by TV to customize viewing according to user tastes and preferences.
Key Risks
- High valuation and trading multiples which are susceptible to de-rating should growth rates miss expectations.
- Escalation of intense competition and streaming wars, especially with Walt Disney (DIS) who own a strong content portfolio covering Disney, Pixar, Marvel, Star Wars, and National Geographic brands and sports streaming service ESPN+. DIS also holds a majority stake in Hulu, which is an online streaming service provider.
- Execution risks around content creation versus content distribution.
- Increasing competition based on price or exclusive content contracts.
- Investment into original content creation fails to live up to the success of exclusive contract deals of existing content.
- Bandwidth issues in emerging economies posing difficulties in penetrating these markets.
- The long-term and fixed cost nature of content commitments hinder NFLX’s operating flexibility.
Key Highlights
- Sheds subscribers for second quarter in a row. After more than a decade of uninterrupted growth, NFLX has been suffering a drop in subscriber numbers in FY22, ending 2Q22 with 220.67m, down -97,000 vs prior quarter (vs management’s forecast of 2m decline), as the Company continues to suffer from the pull forward in demand from the pandemic. The management’s strategy to roll out a cheaper, ad-supported membership scheduled to start in FY23 would not only help reduce churn rate (according to Antenna research NFLX’s churn rates have climbed to 3.3% from 2.4% historically) and help lure new customers especially as tough macro-economic conditions are prompting consumer budget cuts, but also help in profit growth by attracting premium CPMs from brand advertisers by leveraging combination of very engaged audience and high quality content, with a crackdown on password-sharing (NFLX estimates that more than 100m households are currently sharing another one’s account) further boosting subscriber numbers.
- Cashflow profile improving. Cashflow profile continued to improve with net cash from operations in 2Q of $103m (vs outflow of $64m in pcp) and FCF of $13m (vs outflow of $175m in pcp) as transformation of the content model from licensed second run content to mostly Netflix originals (60% of net content assets on balance sheet are now Netflix-produced) continues to bear fruits with the Company now through the most cash-intensive part of the transition, resulting in cash content spend-to-content amortization expense ratio declining from FY19’s peak of 1.6x (along with peak negative FCF of $3.3bn) to 1.4x in FY21 and expected to be 1.2-1.3x in FY22 (resulting in FCF of ~$1bn) with further decline going forward leading to substantial growth in y/y FCF in FY23.
Company Description
Netflix Inc is an American company operating a global entertainment streaming service, which provides subscription video on demand to movies and television episodes over the Internet. The Company operates in three different segments, Domestic Streaming (US market comprising almost half of the business), International Streaming and Domestic DVD (1% of revenue). These businesses generate membership fees as well as revenues from DVD by mail. Netflix provides its services in over 190 countries with over 150 million members, distributing user focused content that fits consumer tastes and preferences.
(Source: Banyantree)
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
As a new public company, Bausch & Lomb will be primarily focused on ramping up research and development to become more competitive in its key markets of contact lens and solution, eyecare surgery, and ophthalmic pharmaceuticals. Bausch & Lomb faced underinvestment as a subsidiary of Bausch Health, partly due to the high debt load of Bausch Health since the collapse of the historical Valeant business, which drew both financial resources and time from senior leadership. With Joe Papa moving to Bausch & Lomb as CEO, the company will have a leadership team that is already very familiar with the business, both areas of strength and product lines that may require more investment. While the near-term results are sure to be lumpy as Bausch finds its footing as public company and incurs short-term separation costs, the business should achieve consistent profitability in the longer term—justifying the narrow economic moat rating—and even if growth continues to trail peers, the returns on invested capital to remain at a decent level, further evidence of underlying business strength.
Bausch’s research and development efforts to focus initially on the contact lens, cataract equipment, and intraocular lens markets. The contact lens business is a market that requires consistently high rates of investment, and Bausch recently entered the daily silicone hydrogel sub-market with the launch of its premium Infuse lens. This lens will be further expanded for toric and presbyopia patients within the next few years. In the surgical space, Bausch trails market-leader Alcon with an approximate 20% share in cataract and vitrectomy (compared with Alcon’s 50%), and the company is overdue for a launch of a new phacoemulsification system, as well. A new phaco launch within five years, which should provide a boost to growth and profits considering the high-margin nature of newer systems. Bausch currently does not have much of a presence in premium intraocular lenses, and also it will be a main research focus for Bausch as the company attempts to play catch up with its peers.
Financial Strength
Bausch & Lomb has adequate financial strength. Following the spinoff from Bausch Health, the company will hold about $2.5 billion of debt with an additional $500 million on a revolver, and the firm will have debt/EBITDA leverage of about 2.9 times. While this is higher than the initial post-spinoff leverage target of 2.5 times, current leverage is reasonable, and the company will work to somewhat reduce leverage over the next few years from free cash flow, it will average over $500 million per year through the five-year explicit forecast period. Interest coverage ratios remain high, as well. The operating income to exceed 2.5 times interest costs for the foreseeable future, and the interest coverage to rise over time. On the other hand, though, some risk related to rising interest rates, which may increase interest expense over time, considering that Bausch’s $2.5 billion term loan is a floating debt instrument. Still, on balance, it does not show that Bausch faces material financial risk, and the firm would be able to handle any marginal increases in debt service costs
Bulls Say’s
- As a standalone public firm, Bausch & Lomb will have the necessary financial flexibility to make investments for the longer term, and patient investors could be rewarded.
- Bausch & Lomb stands to benefit from several secular trends in eyecare: an increasing prevalence of myopia, demand for better eye care from a growing middle class in emerging markets, and an aging population.
- Investors’ worry about Bausch & Lomb’s potential exposure to Bausch Health debts is misplaced, as the firm now operates as a separate legal entity and therefore should be valued as an independent company.
Company Profile
Bausch & Lomb, headquartered in Laval, Quebec, Canada, is the fourth-largest vision care company by sales in the United States and the market leader in consumer vision care in India and China. The firm, which was previously a subsidiary under parent company Bausch Health, was spun off to become a public company once again in May 2022. The firm reports in three segments—vision care and consumer (60% of revenue), surgical (20%), and ophthalmic pharmaceuticals (20%). The company is geographically diversified, with 48% of revenue in the Americas, 30% from EMEA, and 22% from Asia-Pacific countries.
(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.
Investment Thesis:
- Reasonable valuations – SUN currently trades on a 2-yr forward PE-multiple of 11.6x and a fully franked yield of 6.5%.
- Company reaffirmed FY23 targets and a solid FY23 outlook.
- APRA allows advanced accreditation for SUN’s Bank resulting in capital relief.
- Better than expected margin outcome in banking and general insurance (GI).
- Positive industry changes from the Royal Commission recommendations.
- Continual strong credit quality for its Bank and Wealth segment whilst maintaining net interest margins.
Key Risks:
- Greater than expected competition in lines of insurance affecting pricing, unit growth, and risk management.
- Continuing elevated natural catastrophe occurrences such as the NSW bushfires, which will use up reinsurance and impact SUN’s earnings.
- Not achieving key targets for FY21 such as the rollout of the Company’s technology and digital platforms.
- Weaker than expected investment yields.
- Lower net interest margins or higher provisions than expected.
- Increased levels of claims.
Key Highlights:
- Cash return on equity above the through-the-cycle cost of equity.
- Dividend pay-out ratio of 60% to 80% of cash earnings, remains unchanged.
- General Insurance. Underlying ITR of 10 – 12% by FY23.
- Banking. Cost-to-income ratio of Banking ~50% by end of FY23. SUN’s management also provided FY23 Outlook, expecting: (i) GWP growth expected to be in the mid to high single digits; (ii) Price increases to reflect increasing reinsurance and natural hazards costs and inflationary environment; (iii) Unwind of mark-to-market investment losses to grow yield and support UITR; (iv) Prior year reserve releases expected to moderate; (v) Transitory capital impacts to unwind.
- FY22 Results Highlights. Relative to the pcp: (1) Group net profit after tax of $681m, down 34.1% impacted by volatile investment markets and elevated natural hazard costs. (2) The Board declared a fully franked final ordinary dividend of 17cps, bringing total fully franked ordinary dividends for FY22 to 40cps, and represents a full year dividend payout of 75% of cash earnings and within SUN’s target payout ratio range of 60% to 80%.
- Results highlighted by division. Profit after tax of $697m, was down -40.2%, whilst cash earnings of $673m was down -36.7%, due to weaker performance across all segments, especially in Insurance Australia. Relative to the pcp:
- Insurance Australia. Profit after tax of $174m, was down -68.2% due to intense natural hazard season and volatile financial markets. Net incurred claims of $5,328m was +3.1% higher whilst insurance trading result of $464m was -28.0% down despite gross written premium (excluding Emergency Services Levies) of $9,384m, was up +9.2%.
- SUN Banking. Profit after tax of $368m, was down -12.2%. Net interest margin fell 14bps to 1.93%. Home lending, up $4.1bn or 9.0%. Cost to income ratio of 59.0% was up 190bps, due to one-off unrealised mark-to-market losses and an increase in strategic investment. Normalising for these factors, the ratio reduces to 57.5%. SUN Bank maintained strong capital, funding and liquidity metrics (CET1 capital ratio of 9.08% remained within the target operating range of 9.00% to 9.50%).
- SUN NZ. Profit after tax of $155m, was down -22.5%. General Insurance profit after tax was NZ$150m, down 15.3%. GWP increased 14.1% driven by strong growth across all product classes via unit growth and GWP increased 14.1% driven by strong growth across all product classes via unit growth and targeted pricing increases to offset inflationary pressures on claims. Net incurred claims rising bond yields and volatility in equity markets. Operating expenses were up 7.2% to NZ$504m, supporting growth across the business.
Company Description:
Suncorp Group Ltd (SUN) provides general insurance, banking, life insurance, and superannuation products and related services to the retail, corporate, and commercial sectors in Australia and New Zealand. The company operates through Personal Insurance, Commercial Insurance, General Insurance New Zealand, and Banking segments.
(Source: Banyantree)
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.
Investment Thesis
- Cost out program to support earnings over the long-term.
- End to the U.S. Federal Reserve capital-imposed restrictions.
- End to various investigations and inquiries.
- Revenue growth driven by consumer and business.
- Credit quality remains solid.
- Positive changes to the regulatory environment.
- New CEO and organization structure could bring about a positive and sustainable growth trajectory for the bank.
- Improving ROTCE (aiming to hit 10% near-term & 15% over the long-term).
Key Risks
- Declining net interest margins from low yields and Fed cuts.
- Lack of future management direction with no permanent CEO installed.
- Intense competition to loan growth.
- Funding pressures for deposits and wholesale funding.
- Political and regulatory changes affecting the banking legislation.
- Credit risk with potential default of mortgages, personal and business loans and credit cards.
- Legal fees associated with ongoing investigations into wealth management, wholesale banking and community lending.
Key Highlights
- Net interest income increased +16% y/y, primarily due to the impact of higher interest rates, higher loan balances (average loans up +8% y/y), lower mortgage-backed securities premium amortization, and a decrease in long-term debt, partially offset by lower interest income from Paycheck Protection Program (PPP) loans and loans purchased from securitization.
- Non-interest income decreased -40% y/y, primarily driven by lower results in affiliated venture capital and private equity businesses, including impairments driven by market conditions; a decline in mortgage banking income driven by lower originations and gain on sale margins, as well as lower gains from the re-securitization of loans purchased from securitization pools; the impact of divestitures; and lower investment banking fees, partially offset by improved results in Markets business.
- Non-interest expense decreased -3% y/y, with personnel expense down predominantly reflecting divestitures, lower revenue-related compensation, as well as the impact of efficiency initiatives and non-personnel expense decrease reflecting divestitures and lower consultant spend, partially offset by higher operating losses primarily driven by an increase in litigation accruals and higher customer remediation expense predominantly for a variety of historical matters.
- Provision for credit losses was $580m (vs release of $1260m and $787m in 2Q21 and 1Q22, respectively) and included a $235m increase in the allowance for credit losses due to loan growth.
- Average loans grew +8% y/y (+3% qoq) amid increases in both commercial and consumer portfolios with average loan yields increasing +19bps y/y (+27bps qoq) reflecting the benefit of higher rates, and average deposits increased +1% y/y with growth in Consumer Banking and Lending offsetting declines across other operating segments with average deposit cost increasing by +1bps over y/y and qoq to 4bps, driven by higher deposit costs in Corporate and Investment Banking.
Company Description
Wells Fargo & Company (WFC) is a diversified, community-based financial services company with $1.9tn in assets, making it the world’s second largest bank by market capitalization and the fourth largest bank in the U.S. by total assets. The company was founded in 1852 and provides banking, investment and mortgage products and services, as well as consumer and commercial finance, through 7,800 locations, more than 13,000 ATMs, the internet and mobile banking. The company operates under three segments; Community Banking, Wholesale Banking and Wealth & Investment Management.
(Source: Banyantree)
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.
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