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Dividend Stocks

Hannover Re a Rare Moat in Reinsurance

Business Strategy & Outlook:   

Hannover Re is a property and casualty, and life and health reinsurer with property and casualty contributing a little over two thirds of the company’s profits to shareholders. Hannover Re has slightly less than double-digit market share in both these divisions. This is a business that is characterized by underwriting and carving deep expertise in niche areas. While this may sound a bit wooly, some of this underwriting difference comes from the overall ownership of the underwriting process by Hannover Re’s underwriters. Company conceptualizes this through lenses of decision-making and responsibility. Whereas in other reinsurance firms, underwriters may need to defer back to a head of risk or perhaps even the c-suit, underwriters at Hannover Re have more authority and a better line of sight. Furthermore, it is anticipated that this leads to stronger client relationships because underwriters are client-facing and thus renewals a reiterative negotiation, with Hannover Re’s underwriters in the position to directly negotiate and discuss client needs without the need for constant deferral. This drives stronger retention rates, thereby lowering commissions and acquisition costs. 

In addition to the culture of excellence in underwriting with a proven reputation for expertise in specialist lines, Hannover Re benefits from an expense advantage and these two benefits are aligned. For example, with deeper and stronger expertise in underwriting, Hannover Re retrocedes less than comparable European reinsurance companies. As the business has the institutional capacity to absorb this internally with regard to its frontline, coupled with the lower levels of internal referrals outlined, Hannover Re supports more premium per employee than other comparable. The outcome of this is tangible with the business benefiting from at least a 1 percentage point expense-ratio advantage.

Financial Strengths:  

Hannover Re has a sound balance sheet. It has one of the better balance sheets among the companies in European reinsurance coverage. While debt to equity is a little higher than the company would like to see at 36.8%, the debt to us looks quite clean because there is no hidden debt within equity. The maturity of the debt is relatively long-dated with the closest maturity arising in over five years. Overall, coupon rates are low and so the combination of the two is encouraging. Further recent debt issues have carried similar rates of interest.

Bulls Say: 

  • Hannover Re has a strong culture of expertise and experience in specialist underwriting. 
  • Hannover Re is a cost leader with one of the lowest proportional amounts spent on administrative expenses. 
  • Hannover Re focuses on organic growth rather than acquisitions. This comes through in its lean structure, lower expenses, and approach to capital management.

Company Description:  

Hannover Re is a German-based reinsurance company with a strong reputation in writing specialist lines of reinsurance and a low-cost operating model. The business and its management team are highly disciplined, rarely ever acquiring and favoring a strategy of special dividends over committing to buybacks when looking to return excess capital to shareholders. Company also finds the business innovative in finding alternative and unearthed profit sources.

(Source: Morningstar)

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

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

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

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

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

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

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

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Commodities Trading Ideas & Charts

Soaring Refiner Margin Launch No-Moat Ampols Q2 2022. FVE Increases to AUD 34.50

Business Strategy & Outlook:   

Ampol owns and operates a major refined petroleum product import terminal at Kurnell in Sydney and a refinery at Lytton in Brisbane. Annual refining capacity fell by half to 6.0 billion liters, about one third of company marketed volumes, when Kurnell closed. Kurnell refinery was shut in 2014 because of operational issues and unfavorable demand for the product mix. Refineries and finished product import terminals are integrated with pipelines, distribution, and marketing. The national service station network exceeds 2,000, including 350 jointly branded Ampol/Woolworths (ASX: WOW) sites. Strong growth in transport fuels reflects favorable market attributes. Australia’s relatively sparse rail network and low population density favor trucks for distribution of goods. Pandemics notwithstanding, volumes in the Australian liquid fuels market grow at close to growth rates in gross domestic product, with solid increases in diesel and jet fuel consumption offsetting a slow decline in petrol. 

Ampol’s extensive network and comprehensive product offerings provide some competitive advantage. A very efficient supply chain makes Ampol an effective competitor. Still don’t see this as sufficient to justify a moat rating other than none. The closure of refining sees Ampol’s business rest largely on fuel distribution. In this space, it wrestles with expert competition in BP, Shell, and Mobil. Potential long-term threats include substitution of diesel for alternative fuels such as liquid natural gas, or LNG, and electricity. In the case of LNG in particular, Ampol is likely to participate in any shift via its logistics network and filling stations. Ampol maintains a market-leading 35% share of all transport fuels sold. Ampol substantially rests on its competitive supply chain now that Kurnell has been converted into an import terminal. Competitive pressures in the refining segment meant Ampol could not earn its cost of capital on Kurnell. The highly profitable and fast-growing marketing segment can enjoy increased investment that was previously wasted in laggard refining. Ampol successfully completed an NZD 2.0 billion bid for New Zealand peer Z Energy in first-half 2022.

Financial Strengths:  

Ampol completed a NZD 2.0 billion or NZD 3.78 per share cash offer for Z Energy via scheme of arrangement in first-half 2022. Company viewed this as a sound move on its part given compelling value. Ampol funded the acquisition in accordance with its existing capital allocation framework, including an adjusted net debt/EBITDA target of 2.0-2.5 times. Ampol will have to sell down some New Zealand assets to meet NZ competition guidelines. This includes the Gull network. Z Energy had NZD 608 million net debt at end March 2021, net debt/EBITDA of 2.67 quite high versus Ampol’s AUD 724 million at end December 2021, but this in the context of a low growth company focused on yield. Ampol’s standalone leverage was conservative at 18.6% (ND/(ND+E)) and annualized net debt/EBITDA is just 0.8. Company expected Ampol’s post acquisition gearing to temporarily increase to around 35%, ignoring potential for an equity raise or asset sell down. While this is manageable and within Ampol’s target net debt/EBITDA range of 2.0-2.5, current strong cash flows courtesy of refiner margins will be more than welcome. The balance sheet is in reasonable shape to fund a minimum AUD 100 million investment in new energy and decarbonization projects.

Bulls Say: 

  • Ampol is well placed, with a leading market share in transport fuels. This position is backed by an extensive distribution network. 
  • Australia’s demand for transport fuels is growing at close to GDP rates. 
  • Closing the highest-cost Kurnell refining operations materially improved return on invested capital.

Company Description:  

Ampol (nee Caltex) is the largest and only Australian-listed petroleum refiner and distributor, with operations in all states and territories. It was a major international brand of Chevron’s until that 50% owner sold out in 2015. Caltex transitioned to Ampol branding due to Chevron terminating its license to use the Caltex brand in Australia. Ampol has operated for more than 100 years. It owns and operates a refinery at Lytton in Brisbane, but closed Sydney’s Kurnell refinery to focus on the more profitable distribution/retail segment. It successfully completed a NZD 2.0 billion bid for New Zealand peer Z Energy in first-half 2022. 

(Source: Morningstar)

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

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

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

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

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

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

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

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Dividend Stocks

Munich Re is the largest reinsurer in the world by gross premiums written

Business Strategy & Outlook

Munich Re is the largest reinsurer in the world by gross premiums written. A business of this size in an industry that is geared toward diversification rarely has an opportunity to improve returns on equity beyond efficiency. By that, they carve out a superior competitive position by utilizing information technology and scale in order to drive down expenses. However, in the case of Munich Re, while the occurrence of this dynamic, the implementation of innovative technology was key to the ongoing strategic positioning and development of the business. What is witnessed is institutional knowledge that is being transferred from one specialist area within the business to a division that is more commonly associated as a commodity. In the years that this transfer has taken place, one can see an improvement in divisional operating metrics. For the business unit in question, to calculate this as operating profit over gross premiums written. 

More broadly, over the past two decades, only one of Munich Re’s divisions has earned its cost of capital: nonlife reinsurance. Here, the division has earned an implied 12.3% return on equity versus the 9.0% that at the group level. Returns to shareholders in the life reinsurance division have been anemic at around 4.7% over this same period. However, it is work in the primary insurance division that is creating a competitive tailwind, combined with a growing contribution from risk solutions that houses the Hartford Steam Boiler business and sits within nonlife reinsurance.

Financial Strengths

The Munich Re is generally in good financial health and one can assess this through the solvency position. Munich Re reported a 231% solvency ratio at the end of first-quarter 2022, above its targeted 175% to 220% range.

Bulls Say

  • Munich Re has one of the strongest management teams in European insurance coverage. 
  • There is a strong focus on innovation in the business that is unusual for a company of this size and leadership. 
  • The turnaround to date of Ergo has been strong. This division is now earning over its cost of capital and there continues to be scope for improvement.

Company Description

Munich Re is one of the largest reinsurance firms in the world. It also serves clients with primary insurance.

(Source: Morningstar)

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

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

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

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

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

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

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

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Dividend Stocks

Australian Household Debt Levels Are a Risk, But Westpac Is Not as Risky as Share Price Implies

Business Strategy & Outlook:   

Westpac Bank is the second-largest of Australia’s four major banks. The bank provides a range of banking and financial services to retail and business customers, including mortgages, consumer finance, credit cards, business loans, and term deposits. Following the divestment of its financial planning and advice business, even its wealth arm–BT Financial Group–is likely to go. Under new leadership, most non banking units are being divested, including general, life, and mortgage insurance. Westpac’s strategy is anchored in its commitment to conservatively manage risk across all business areas, following its near-death experience in the early 1990s. The multi-brand, customer-focused strategy aims to capture an increasing share of business from its Australian and New Zealand banking and wealth management customer base. 

Westpac established itself as an integrated financial services group in the early 2000s with its expansion into wealth management, acquiring Rothschild, BT Financial Services, and Hastings. The company diversified domestically by acquiring St. George Bank in 2008, providing access to a broader customer base and adding scale. Westpac has a 22% share of home lending. While risks directly related to coronavirus have abated, wage pressures, labor, and supply chain challenges, and high inflation pose challenges as the cash rate increases. The main current influences on earnings growth are modest credit growth and widening margins as the banks reprice lending rates in a rising cash-rate environment. Operating expenses should continue to fall as the bank resets its cost base after completing a number of remediation and technology projects. The bank has suffered from slow approval times in home lending, but expects increased resources and digital investments to improve service levels. After enjoying super-low impairment charges pre-2020, large loan losses expected due to COVID-19 resulted in large provisions in fiscal 2020.The expected return to midcycle levels around 0.18% in fiscal 2025.

Financial Strengths:  

Westpac comfortably meets APRA’s common equity Tier 1 ratio benchmark of 10.5%. The bank’s common equity Tier 1 ratio was 11.3% as at March. 31, 2022, with the bank’s target range of 11% to 11.5%. This is based on APRA’s globally conservative methodology and a top-quartile internationally comparable 17.4%. The risk of higher loan losses is viewed and credit stress inflating risk-weighted assets as the greatest threat to the bank’s capital position in the near term. In the past three years, the proportion of customer deposits to total funding is about 60% to 65%, reducing exposure to volatile funding markets. After completing an AUD 3.5 billion share buyback in February 2022 Westpac has AUD 3.8 billion in excess capital as at March 31, 2022.

Bulls Say: 

  • Improving economic conditions underpin profit growth from fiscal 2021. Productivity improvements are likely from fiscal 2023.
  • Cost and capital advantages over regional banks and neo-banks provide a strong platform to drive credit growth.
  • Consumer banking provides earnings diversity to complement the more volatile returns generated from business and wholesale banking activities.

Company Description: 

Westpac is Australia’s oldest bank and financial services group, with a significant franchise in Australia and New Zealand in the consumer, small business, corporate, and institutional sectors, in addition to its major presence in wealth management. Westpac is among a handful of banks around the globe currently retaining very high credit ratings. The bank benefits from a large national branch network and significant market share, particularly in home loans and retail deposits.

(Source: Morningstar)

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

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

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

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

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

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

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

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Morning Report Global Markets Update – 15 July 2022

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Brokers Call – 15 July 2022

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Global stocks Shares

Wide-Moat Nike Faces Challenges, but Its Powerful Brand and Digital Strategy Position It Well

Business Strategy & Outlook:   

Company views Nike as the leader of the athletic apparel market and believes it will overcome the challenge of COVID-19 despite near-term supply issues. The wide moat rating on the company is based on its intangible brand asset, it will maintain premium pricing and generate economic profits for at least 20 years. Nike, the largest athletic footwear brand in all major categories and in all major markets, dominates categories like running and basketball with popular shoe styles. While it does face significant competition, the company believes it has proven over a long period that it can maintain share and pricing. Company thinks Nike’s strategies allow it to maintain its leadership position. Over the last few years, Nike has invested in its direct-to-consumer network while cutting wholesale accounts like Belk and Dillard’s. In North America and elsewhere, the firm has reduced its exposure to undifferentiated retailers while increasing its connections with a small number of retailers that bring the Nike brand closer to consumers, carry a full range of products, and allow it to control the brand message. Nike’s consumer plan is led by its Triple Double strategy to double innovation, speed, and direct connections to consumers. Triple Double includes cutting product creation times in half, increasing membership in Nike’s mobile apps, and improving the selection of key franchises while reducing its styles by 25%. It is considered that these strategies will allow Nike to hold shares and pricing.

 Although its recent results in China have been inconsistent due to supply issues and a political controversy, I still believe Nike has a great opportunity for growth there and in other emerging markets. The firm experienced double-digit annual sales growth in six of the past eight years in greater China and, fueled by high government investment in athletics, it will do so again after the current difficulties have passed. Moreover, with worldwide distribution and huge e-commerce that exceeded $10 billion in fiscal 2022, Nike should benefit as more people in China, Latin America, and other developing regions move into the middle class and gain broadband access.

Financial Strengths:  

Company believes Nike is in excellent financial shape to weather the COVID-19 crisis. At the end of fiscal 2021, Nike had $9.4 billion in debt but $13 billion in cash and short-term investments. Its debt/adjusted EBITDA and debt/equity were 1.3 and 0.6, respectively. Nike does not have any long-term debt maturities until May 1, 2023, when its $500 million in 2.25% senior unsecured debt matures, but it does have significant endorsement commitments of more than $1 billion per year. Nike has an unused credit facility of $1 billion and a separate $3 billion commercial paper facility for short-term borrowing, so it has significant unused borrowing capacity. The firm, with its investment-grade credit ratings, could easily increase debt for stock repurchases or other uses. Nike may also make acquisitions, although these are likely to be technology-focused and fiscally immaterial. It is anticipated Nike will continue to return significant cash to shareholders. The firm produced $20.6 billion in free cash flow to equity over the past five years, and estimates it will generate more than $40 billion in free cash flow to equity over the next five. It completed a $12 billion stock-repurchase program authorized in 2015 and has begun to repurchase stock under a four-year, $15 billion stock-repurchase program authorized in 2018. Moreover, Nike issued $1.8 billion in dividends in fiscal 2022, and forecast an average annual dividend payout ratio of 28% over the next decade. Over the next five fiscal years, the company forecasts that Nike will repurchase about $24 billion in stock and issue $11 billion in dividends.

Bulls Say: 

  • Nike has a great opportunity in fast-growing markets like China. More than 70% of Nike’s growth over the next five years may come from outside North America. 
  • Nike’s Triple Double strategy of increased innovation, direct-to-consumer sales, and speed may improve margins and share. Membership growth in its digital channel has exceeded expectations.  
  • Nike’s gross margins may expand by a couple dozen basis points per year through automation, ecommerce, and higher prices. Nike is actively shifting sales to differentiated retail in North America to increase full-priced sales.

Company Description:  

Nike is the largest athletic footwear and apparel brand in the world. It designs, develops, and markets athletic apparel, footwear, equipment, and accessories in six major categories: running, basketball, football (soccer), training, sportswear, and Jordan. Footwear generates about two thirds of its sales. Nike’s brands include Nike, Jordan, and Converse (casual footwear). Nike sells products worldwide and outsources its production to more than 300 factories in more than 30 countries. Nike was founded in 1964 and is based in Beaverton, Oregon. 

(Source: Morningstar)

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

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

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

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

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

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

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

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Daily Report Financial Markets

Japan Market Outlook – 15 July 2022

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Shanghai Market Outlook – 15 July 2022

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Technology Stocks

Atlas Copco is a market leader with a focused product portfolio of mainly compressors and vacuum pumps

Business Strategy & Outlook

Atlas Copco is a market leader with a focused product portfolio of mainly compressors and vacuum pumps. These two product areas contribute around three fourths of revenue and four fifths of profit for the company. Its two smaller divisions, industrial technique and power technique, make up the remaining revenue. The company’s equipment is highly engineered, often with customization and application-specific variations. To that point, equipment sales are done by engineers. End markets for the company’s compressors are diverse, from automotive assembly to food processing. However, for vacuum pumps, semiconductor chip demand is the key driver. The electronics industry contributes two thirds of vacuum pump division revenue and, as a result, nearly one fifth of revenue for Atlas Copco at the group level.

 The economic cycle can cause short-term demand volatility, but the company’s flexible cost structure and large portion of service revenue underpin double-digit margin and returns throughout the cycle. Around 75% of its equipment components are outsourced. Maintenance services and spare parts contribute more than one third of group revenue. The company leverages its large service operations and trains its technicians to service competitors’ equipment as well as its own. The compressor division brings in the largest portion of service revenue at more than 40% of division revenue. The Atlas Copco’s compressor division is around twice as large as its closest competitor, Ingersoll Rand. Atlas Copco uses this near ubiquity to its advantage by acquiring other equipment and tool portfolios that it can sell to its air compressor base. Higher-volume production capabilities and an installed distribution channel allow the company to globalize the products of its acquired businesses at a lower cost than those operations could achieve by themselves.

Financial Strengths

Atlas Copco has a strong balance sheet, with around SEK 29 billion in gross debt and a net debt/EBITDA ratio of less than 1 times at the end of March 2022. Included in its debt is around SEK 11 billion in debt maturities through to 2026. However, one cannot see this as a risk as a forecast roughly SEK 22 billion in annual free cash flow for the medium term, which in theory would enable the company to pay down its total gross debt within three years.

Bulls Say

  • Atlas Copco’s tools are used in automation, including robotic applications, and offer some structural growth to an otherwise cyclical revenue stream. 
  • The expansion into vacuum technologies gives Atlas Copco exposure to long-term semiconductor growth. 
  • The company’s large, experienced service organization should help it to continue to gain share of service revenue across its own products and potentially competitors’ equipment, particularly for compressors.

Company Description

Atlas Copco is a 140-year-old Swedish company and a pioneer in air compression technology. Today, the company is still the world’s leading air compressor manufacturer, with around 25% market share. The company’s product portfolio includes power tools and vacuum pumps. For vacuum pumps, the semiconductor chip cycle is a key demand driver. The company generates revenue from three sources: initial equipment sales, spare parts, and maintenance. Its operations span 180 countries.

(Source: Morningstar)

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