Business Strategy & Outlook

Honda’s products and strong financial position should keep it on solid ground, but the competition is fierce and the U.S. market’s move to light trucks, where Honda’s lineup is not as complete as competitors, may be permanent. Ongoing risks include foreign-exchange volatility, a highly competitive U.S. market, and rising steel prices. Honda’s brand and reputation for quality drive demand for its vehicles, but its longtime niche in fuel-efficient cars historically positioned the company well to take advantage of consumers seeking more fuel-efficient vehicles. Over 2003-09, the U.S. car/light-truck mix moved to 55%/45% from 46%/54%, but as gas prices fell and light-truck fuel economy improved, cars have lost share to just 22% in 2021. In 2021, cars made up 37% of Honda’s U.S. sales mix, compared with 31% for Toyota, 7% for General Motors, and 4% for Ford. Honda’s car focus gives it an advantage whenever the critical U.S. market has high gas prices, but with cheap oil, the Honda leaves share on the table in segments such as full-size pickups and large SUVs, as it does not have product in these segments. One had liked to see Honda attain a more complete vehicle lineup. The company instead seems to be focusing on efficiency by targeting a two thirds reduction of vehicle trim and option choices across its five global models, such as Civic and Accord, by 2025 versus 2018 levels. As of April 2022, it has achieved an over 50% reduction.

Despite a strong car and crossover lineup, formidable threats remain, such as rising commodity prices and inflation making input costs expensive while hurting consumers’ purchasing power. Honda can mitigate this problem by using more common-size vehicle platforms to reduce costs, but even that is no guarantee. A weak dollar relative to the yen can also hurt profits. Honda does a good job producing where it sells to mitigate exchange risk. In 2020, Honda announced it will buy EV batteries from GM’s Ultium battery line, and in April 2021 new CEO Mibe said Honda targets a 100% global zero emission (electric and hydrogen fuel cell) vehicle lineup by 2040. Honda is planning to move beyond hybrids.

Financial Strengths

Honda’s financial position is excellent, as the company has a small debt load. The Honda’s cash and available credit lines at March 31, 2022, to be about JPY 7.5 trillion. This flexibility is important because it gives the company plenty of room to acquire more capital in the debt markets if needed. Excluding the captive finance company, Honda held about JPY 3.3 trillion in cash at the end of fiscal 2022. They calculate a net cash position at year-end fiscal 2022, excluding the captive finance arm, of nearly JPY 2.5 trillion. As of year-end fiscal 2022, the consolidated company has JPY 3.8 trillion of unused credit lines. Its debt/EBITDA ratio excluding the financing arm is generally well below 1 but was 1.3 in fiscal 2012 due to the Japan earthquake and Thai flooding. One can not see Honda having any problems meeting debt maturities, and they expect the company even before financial services results to be free cash flow positive over most of the forecast period.

Bulls Say

• Honda’s popular vehicles usually allow it to use fewer incentives than the Detroit Three, boosting the firm’s profits and improving the resale value of its vehicles. 

• Honda enjoys a reputation for quality, especially in America’s large coastal markets, but management is concerned about quality problems in recent years and Honda has slipped in U.S. J.D. Power quality rankings. 

• In 2021, Honda produced about 95% of its vehicles sold in the U.S. in North America. This means Honda is better positioned than Toyota (71%) to withstand the yen when it is very strong against the dollar.

Company Description

Incorporated in 1948, Honda Motor was originally a motorcycle manufacturer. Today, the firm makes automobiles, motorcycles, and power products such as boat engines, generators, and lawnmowers. Honda sold 21.1 million cars and motorcycles in fiscal 2022 (4.1 million of which were autos), and consolidated sales were JPY 14.6 trillion. Automobiles constitute 63% of revenue and motorcycles 15%, with the rest split between power products and financial services. Honda also makes robots and private jets.

(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

Polaris is one of the longest-operating brands in powersports. Its brands, innovative products, and lean manufacturing yield the firm a wide economic moat and that it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy. However, Polaris’ brands do not benefit from switching costs, and with peers innovating more quickly than in the past, it could jeopardize the firm’s ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.

Polaris had sacrificed some financial flexibility after its transformational acquisitions of TAP (2016) and Boat Holdings (2018), but debt-service metrics have been rapidly worked down via EBITDA expansion and cost-saving scale benefits (with debt/adjusted EBITDA set to average around 1.0 times over the forecast). This unlocks Polaris ability to continue to serially acquire strategic businesses (with opportunities likely in the marine and parts and accessories segments), which could help stimulate incremental demand. For now, a 8% top-line lift in 2022 (after accounting for the expected sale of TAP), as Polaris attempts to fill advance orders and backfill dealer inventory, a rate one can think will return to a low-single-digit rate in 2024 (if scarce dealer inventory levels are remedied). International (low-double-digit percentage of sales) expansion over the long term also remains promising and could drive demand upside, particularly as Polaris increases its global operating footprint with a wider physical presence abroad. As evidenced by solid ROICs (at 26%, including goodwill, in 2021), Polaris still has top notch brand goodwill in its segments, supporting consumer interest and indicating the firm’s brand intangible asset is intact. However, with constraints in the supply chain, 2022 could see some volatility in market share gains, depending on the availability of certain products at retail (the snow segment suffered this plight in the most recent quarter). The modest market share gains to ensue ahead, signaling the firm’s competitive edge is intact.

Financial Strengths

Exiting the recession, rising profits led to increases in company equity, which helped reduce debt/capital from 49% in December 2009 to 31% in December 2015. With the addition of leverage from the acquisition of TAP (which is set to be sold in 2022), and the financing of Boat Holdings in 2018, Polaris ended 2018 with debt/adjusted EBITDA above 2 times and debt/capital of 69%. However, they expect robust demand and successful execution through COVID-19 to restore the metrics to 47% and to 1.1 times, respectively, at the end of 2022, a very manageable level that the company should be able to maintain. Additionally, Polaris is poised to produce strong cumulative free cash flow to equity over the next five years’ worth around $3.4 billion; thus, there should be no concern repaying debt as it comes due. The current revolver ($1 billion) and corresponding term loan ($900 million) are set to mature in 2026. And in December 2021, Polaris secured an incremental 364-day term loan for $500 million, which can be refinanced if needed. There is no meaningful debt coming due until 2026, confirming the opinion that Polaris has plenty of financial flexibility. The company maintains flexibility in its capital structure through stock repurchases and dividends. Polaris has restored share repurchases in 2021 as demand has proved consistent through COVID-19, and it will continue to fund (and grow) its annual dividend, which is currently set at $0.64 per share quarterly (2.5% yield).

Bulls Say

• Polaris has historically had a strong reputation for innovation, and new product lines and acquisitions have supported solid performance in both strong and difficult environments. 

• Profit margins could tick up faster than with faster than enterprise average volume growth from the sizable off-road and low operating expense marine business segments. 

• Management remains focused on operating as a best-in-class manufacturer. With continuous improvement at existing facilities, the pursuit of excellence should support stable operating margin performance.

Company Description

Polaris designs and manufactures off-road vehicles, including all-terrain vehicles and side-by-side vehicles for recreational and utility purposes, snowmobiles, and on-road vehicles, including motorcycles, along with the related replacement parts, garments, and accessories. The firm entered the boat market after acquiring Boat Holdings in 2018, offering exposure to new segments of the outdoor lifestyle market. Polaris products retailed through more than 2,500 dealers in North America and through 1,500 international dealers as well as more than 30 subsidiaries and 90 distributors in more than 120 countries outside North America at the end of 2021.

(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.

Investment Thesis:

• High quality company with a history of earnings and dividend growth.
• Management is looking to double EPS every five years. HLMA’s group earnings growth model is driven by organic and acquired growth. 
• HLMA earnings are defensive as HLMA is exposed to attractive end markets which are niche and regulated in some shape or form – such as safety, medical and infrastructure.
• HLMA consists of a strong diversified portfolio of companies (currently 45 companies). 
• Strong management team with strong corporate culture. 
• “Private Equity firm with a purpose” – the Company is not limited by a timeframe to exit positions. 
• HLMA operates a decentralized operating structure with operating companies and management teams left to run their businesses. 
• Scores well on ESG metrics – targeting a science-based emission target (1.5 degree-aligned 2030 target for Scope 1 & 2 emissions), a net zero target (scope 1 & 2 by 2040) and transitioning towards a circular economy.

Key Risks:

• Execution risk – specifically around acquired growth or the inability to source enough deals as the group grows larger.
• Deterioration in global growth or consumption.
• New CEO represents opportunity and risk (strategic misstep).

Key Highlights:

• The Board increased the final dividend by +7% to 11.53p, which combined with interim dividend of 7.35p per share, resulted in a total dividend of 18.88p, up 7% y/y. This was the 43rd consecutive year of dividend per share growth of +5% or more. Net debt (on an IFRS 16 basis which includes lease commitments) increased +7% y/y to £274.8m and represents gearing (net debt to EBITDA) of 0.74x times, within operating range of <2x. HLMA has ample liquidity – refinancing GBP 550m syndicated revolving credit facility (matures in May 2027), completion of a new Private Placement issuance of GBP 330m, with a seven-year average life and additional funding capacity of GBP 260m on maturing of January 2023 tranche of existing Private Placement.
• Organic revenue growth (in CC) in single digit percentage. 
• Return on Sales similar to 2H22 of 20.5%.
• Capex to increase +26% y/y to ~GBP 34m, reflecting a more normal level of spend relative to the increased size of the group, with investment largely focused on the expansion and automation of manufacturing facilities to support future growth, with investment of GBP 20m in Group-wide technology (vs GBP 11m in pcp) primarily focused on delivering enhanced security, improved data and analytics capabilities, and support for companies in upgrading their operating technology and creating new digital models. 
• Central costs to increase +29% y/y to GBP 40m. 
• Net financing cost (assuming no further acquisitions are made) to increase +67% y/y to GBP 14m, reflecting a higher weighted average interest rate in the year.
• Strong FX tailwinds (assuming currency rates for FY23 of USD 1.260/ Euro 1.190 relative to GBP) of GBP 59m on revenue and GBP 13m on profit, with the majority of impact in 1H23. 

Company Description:

Halma Plc (HLMA), listed on the London Stock Exchange, looks to acquire, and grow businesses in niche markets with a global reach. The Company focuses on markets such as medical, safety and environment. Management believes the earnings profile of these markets have a high degree of defensibility and long-term growth drivers. The Company is not like a Private Equity firm which looks to acquire businesses, reduce costs (to improve earnings profile) and then sell within a 5-year timeframe. HLMA looks to buy and hold companies over the long-term. They manage the mix of businesses in a group portfolio to drive sustainable growth and returns over the long term. HLMA looks to acquire businesses to accelerate penetration of more markets, merge businesses where it markets sense, and exit markets if they become less attractive from a long-term growth and returns perspective.  

(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.