Categories
Technology Stocks

With most fixed income trading still primarily voice based, MarketAxess has a long runway for growth ahead of it

Business Strategy and Outlook

MarketAxess operates the leading platform for the electronic trading of corporate bonds. While the company is primarily focused on U.S. securities, 30%-40% of its corporate bond trading volume comes from emerging market debt and Eurobonds giving the company a strong international presence. MarketAxess also offers trading in U.S. Treasuries and municipal bonds, bolstering its efforts in these sectors through the acquisitions of LiquidityEdge and MuniBrokers in 2019 and 2021, respectively. That said, corporate bonds are the core of MarketAxess’ business which is likely to remain true, a consequence of the more competitive nature of the treasury trading market and the smaller amount of municipal debt outstanding. 

Fixed-income markets globally are increasingly moving away from voice negotiated trading toward electronic trading platforms as the liquidity and workflow enhancement of these electronic networks promises to lower implicit and explicit trading costs for increasingly expense conscious firms. As MarketAxess rolls out such new features as automated trade execution and expands its Open Trading all-to-all network, the cost and liquidity advantages of electronic trading networks over traditional methods continues to increase. With most fixed income trading still primarily voice based, MarketAxess has a long runway for growth ahead of it. 

While revenue only grew in the low single digits during 2021, results were affected by a normalization from a cyclical high in corporate bond trading volume market wide in 2020. That said, it must be noted that MarketAxess’ competitor, Tradeweb, found a great deal of success in U.S. corporate bond trading in 2021 as its net hedging and portfolio trading protocols resonated with traders. The rival firm gained market share from voice trading while MarketAxess’ position was largely stagnant. MarketAxess has worked to replicate these features but the company’s competitive positioning in the U.S will bear monitoring in 2022, particularly as the smaller Trumid has gained momentum and support recently.

Financial Strength

MarketAxess is in a strong financial position, even after the series of acquisitions it has made in recent years. At the end of December 2021, the company had over $500 million in cash and investment securities, more than double its total cash outlay on acquisitions over the last two and a half years, and no long-term debt outstanding. MarketAxess enjoys wide margins and strong cash flow, given the countercyclical behaviour of its revenue is in an excellent financial position from a cash flow perspective. MarketAxess’ operating model has high upfront costs but lower incremental capital requirements to support growth once the trading platform and its network have been established. The company’s decision to switch to a self-clearing model for its U.S. operations has materially increased the amount of capital required to maintain its business, but with a strong balance sheet and good operating cash flow the company still has plenty of room to finance investment spending and shareholder returns as it sees fit.

Bulls Say’s

  • MarketAxess enjoys a commanding position in the market for electronic trading of credit bonds, particularly in U.S. high yield securities. 
  • MarketAxess is benefiting from a secular transition away from voice negotiated trading toward electronic platforms, creating strong tailwinds for continued revenue growth. 
  • U.S. corporate bond markets are seeing higher turnover rates as automated trading algorithms, like MarketAxess’ AiEX, see more adoption and trading costs decrease. This increases transaction volume industrywide, creating another tailwind for MarketAxess.

Company Profile 

Founded in 2000, MarketAxess is a leading electronic fixed-income trading platform that connects broker/dealers and institutional investors. The company is primarily focused on credit based fixed income securities with its main trading products being U.S. investment-grade and high-yield bonds, Eurobonds, and Emerging Market corporate debt. Recently the company has expanded more aggressively into Treasuries and municipal bonds with the acquisitions of LiquidityEdge and MuniBrokers in 2019 and 2021, respectively. The company also provides pre- and post-trade services with its acquisition of Regulatory Reporting Hub from Deutsche Börse Group in 2020 adding to its product offerings. 

(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.

Categories
Daily Report Financial Markets

Shanghai Market Outlook – 01 June 2022

Shanghai-Market-Outlook-1-June-2022Download

Categories
Daily Report

Morning Report Global Markets Update -1 June 2022

Morning-Report-Global-Markets-Update-1-June-2022Download

Categories
Daily Report Financial Markets

Shanghai Market Outlook – 31 May 2022

Shanghai-Market-Outlook-31-May-2022Download

Categories
Technology Stocks

Cloud becoming a Material Long- term Driver for Baidu As Q1 2022 Revenue Beat

Statistics chart on laptop display and trader analyzing the data

Business Strategy & Outlook:   

Baidu’s online advertising business accounted for 79% of Core revenue in 2020 and will be the main source of revenue in the medium term given its dominant market share for search engines, but unless it can develop another industry-leading business, it could face long-term challenges for advertising dollars from growing competitors such as Tencent and Bytedance. In recent years, the firm developed its own ecosystem by creating its own Baidu app that incorporates smart mini-programs like Tencent’s WeChat to attract organic user growth but the flagship app has reached 580 million monthly active users in second-quarter 2021, increasing 9% year on year and 4% sequentially, signaling deceleration. Therefore, the signs of a plateau emphasize the importance of being able to commercialize other businesses, but success is far from certain. 

Baidu is transforming its identity by investing in AI firms, mainly AI cloud and autonomous driving, but whether these are commercialized successfully remains to be seen. There are encouraging signs of its AI cloud monetization having seen a 75% CAGR from 2018-20, now accounting for 14% of Core revenue in second-quarter 2021. However, despite sharp growth, Baidu has to face competition in the cloud from industry leaders Alibaba, Huawei and Tencent, which all have greater market share than Baidu. Baidu has invested in other emerging technologies, including speech recognition, AI chips, and autonomous driving. Despite a potential total addressable market for autonomous driving that is 9 times its online advertising per management, commercial success is highly uncertain as revenue remains immaterial, and mass scale adoption or time-to-market are unclear. Its streaming video service, iQiyi, continues to be a margin drag on Baidu’s business due to a high content cost. The business constantly needs to develop or acquire new content to prevent customer churn. We’re less confident of its outlook than the Core product due to a low barrier to entry and numerous competitors. Membership has remained stagnant at 105 million to 106 million subscribers for the last five quarters and therefore, long-term growth is limited.

Financial Strengths:  

Baidu’s balance sheet remains very well capitalized, with around CNY 163 billion in cash and short-term investments to support CNY 76 billion in total debt as of December 2020. Its free cash flow was CNY 3.9 billion in 2020, which is sufficient to fund operations and maintain its moat through investments in new products. As of fiscal 2020, Baidu had an EBITDA/interest coverage ratio of over 50 times. Given the cash-rich nature of the search business, Baidu might initiate repaying interest expense and debts when they are due. As of January 2021, Moody’s maintained Baidu’s A3 rating and changed the outlook from positive to stable.

Bulls Say:  

  • Baidu is strengthening its mobile ecosystem with search, livestreaming, and mini programs, helping to create a closed-loop experience for users to acquire information and make transaction.
  • Baidu is a leader in AI with autonomous driving in terms of number of miles tested and the number of driving licenses in China. Baidu’s AI cloud has also grown significantly in 2020 at 44% year over year, with signs of momentum.
  • Sitting on a cash pile of over CNY 100 billion, Baidu has ample dry powder to invest in technology, particularly in AI, as well as merger and acquisition opportunities.

Company Description: 

Baidu is the largest internet search engine in China with 84% share of the search engine market in September 2021 per web analytics firm, Statcounter. The firm generated 62% of revenue from online marketing services from its search engine in 2020. Outside its search engine, Baidu is a technology-driven company and its other major growth initiatives are artificial intelligence cloud, video streaming services, voice recognition technology, and autonomous driving.

(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.

Categories
Shares Small Cap

Nanosonics’ Third Quarter Largely Consistent With its Second; Shares appear Modestly Overvalued

Businesswoman pointing at diagram in her hands when explaining marketing trends to her team during online meeting

Business Strategy & Outlook:   

Nanosonics’ trophon solution for high-level disinfection, or HLD, of ultrasound probes has garnered substantial market share, as evidenced by penetration of over 75% in Australia and New Zealand and 40% in North America. The elevated growth over the next three years as Trophon continues to gain share in North America and launch in Japan, but high market penetration may be more challenging to achieve in developing economies, which may not be able to prioritise nuanced disinfection standards. Moreover, the device patent expires in 2025, leading to slower volume growth in the medium term. Nonetheless, Nanosonics has a razor-and-blade business model and the installed trophon base supports an ongoing revenue stream from high margin consumables. In 2021 consumables contributed 63% of group revenue. The consumables revenue stream as more secure as its protected from generic substitution until fiscal 2029, and forecast these sales climbing to over 70% of Trophon revenue over the next 10 years. 

Nanosonics primarily distributes via GE Healthcare, its partner across multiple geographies. Recently Nanosonics established a direct sales team in North America, adding to the operating cost base, however, it is expected to see expanding gross margins from this and increasing revenue contribution from consumables. The estimated consumables to roughly earn a gross margin of 85% and devices 65% by fiscal 2026. Outside of trophon, the company expects to launch a new product in flexible endoscope cleaning in 2023. Previously, management intimated the addressable market to be equivalent to trophon and there is greater awareness of the infection issue this product addresses. The broad assumptions of a similar roll-out pattern to trophon from fiscal 2024 onwards and equivalent margins. This supports the views that consolidated companys EBITDA margins will climb to 35% by fiscal 2031 versus 14% in fiscal 2021. The pipeline product contributes roughly 16% of the fair value.

Financial Strengths:  

Nanosonics is in a net cash position and free cash flow positive. The operating model does not require significant capital investment, with the key investments for growth stemming from ongoing R&D spending, building out a salesforce and working capital. Despite having 60-day terms from distribution partners, the current net investment in working capital runs at approximately 28% of revenue due to high inventory holding levels which average roughly 200 days in stock. The forecasted net investment in working capital to remain in line with historical figures, but note it is possible to elevate in the near term as inventory is built up prior to the new product launch and in the early roll-out phase. The company first posted a profit in fiscal 2016 and is yet to pay a dividend, nor it is expected in the future as it invests in underpenetrated markets and its pipeline product. However, the company has free cash flow positive and they forecast it to convert roughly 72% of net income into free cash flow in a typical year.

Bulls Say: 

  • Nanosonics is the market leader in automated HLD of ultrasound probes with significant further market penetration potential in most regions.
  • Establishing its direct distribution model should increase the gross margins achieved by Nanosonics once it reaches critical mass.
  • The company has reached a pivotal point where higher margin consumables dominate the revenue stream. This revenue stream is also protected by patents and the installed trophon device base.

Company Description:  

Nanosonics is a single-product company and its trophon device provides high-level disinfection, or HLD, of ultrasound probes used in semi-critical procedures. The patented technology uses low temperature sonically activated hydrogen peroxide mist that is suitable for probes sensitive to damage. Automated HLD is increasingly being adopted as the standard of care globally as it is superior in preventing cross-infection across patients. Nanosonics’ revenue is made up of capital sales of trophon units, ongoing consumables sales, and service revenue. At June 2021, there were 26,750 trophon units installed globally. Market penetration rates range from over 75% in Australia and New Zealand, roughly 40% in the United States to low-single-digit penetration in EMEA and elsewhere in Asia-Pacific.

(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.

Categories
Property

Buy One Get One Free; Mirvac Securities Are Cheap. Fair Value Uncertainty to Medium.

Business Strategy & Outlook:   

Mirvac securities take the form of a stapled security, comprising one share in the corporation and one unit in Mirvac Property Trust. About 80% of the group’s earnings come from a passive commercial property portfolio housed within Mirvac Property Trust. Earnings from the rent-collecting business are usually stable and predictable, while most of the remainder comes from a residential development business that can be lucrative but is also more cyclical. Mirvac’s REIT status results in low company tax because trusts pass income and tax liabilities through to the end investor. 

Mirvac pays slightly more tax than some pure passive real estate investment trusts, though, because of the development business within the Mirvac corporation Mirvac is gradually reweighting its business in several ways. It is allocating most of its capital toward passive rent collecting and is currently within its target of 85%-90% of capital invested there. Within that, it is allocating more to office and industrial, trimming retail exposure, and refocusing its retail portfolio on urban areas. On the development side, more houses are expected (via master-planned communities) and fewer apartments in Mirvac’s residential earnings in the coming years. It also has a higher weight to commercial property development, mainly in office. Within residential, it is rolling out some build-to-rent projects, though this business is only a small portion of the portfolio at present. The shift toward master-planned communities will diversify earnings. However, the build-to-rent business as a yet-to-be proven concept. It remains to be seen whether renters will accept institutions as landlords in Australia. Mirvac’s first project, LIV Indigo in Sydney, was 93% leased by December 2021. The concept looks viable with low interest rates and low yields on commercial property, and few build-to-rent rivals, but should those conditions reverse, other business lines may look more attractive.

Financial Strengths: 

Mirvac is in reasonable financial health, with gearing (net debt/assets) of 22%, based on its Dec. 31, 2021, accounts. This is at the low end of the group’s targeted range of 20%-30%. The group’s average cost of debt was 3.3% at its December 2021 results, and it might grind higher in the wake of interest-rate rises. Even so, the group’s weighted average debt maturity is about six years and the group has no major debt maturities until fiscal 2023. This gives it flexibility, which could come in handy in acquiring new sites for the residential land bank or office portfolio during any downturn. Gearing will rise based on further acquisitions and development, and asset devaluations in its commercial property portfolio (with retail under particular threat). However, Mirvac’s development pipeline is expected to be lower-risk, with projects at or near completion, and with mostly high levels of tenant commitments. This should prevent gearing rising excessively until the outlook for recovery from coronavirus is clearer. Caution is appropriate, given that the extended boom in property has pushed up asset prices, which could make gearing appear to be lower than it really is. Moreover, pressure on earnings is likely, and dividend cuts remain a risk if the group decides it needs to preserve cash.

Bulls Say: 

  • A resumption of inbound immigration should support the value of Mirvac’s assets and underpin the viability of major development projects that the group has in its pipeline.
  • Mirvac has been shifting toward industrial exposure, a sector that was less affected by the coronavirus, and could benefit as businesses seek to invest in local supply chains and e-commerce capabilities.
  • Demand could continue for quality real estate from the likes of pension funds, sovereign wealth funds, and other offshore investors, especially as the Australian economy has dealt with the coronavirus health crisis better than some, which could allow a faster resumption of business activity.

Company Description: 

Mirvac is one of Australia’s largest residential developers, particularly apartments. Residential development earnings are volatile, generating about a fifth of EBIT in fiscal 2019, despite only about 13% of the group’s invested capital being allocated there. There was a cyclical high and don’t expect development settlements to substantially exceed the 2019-20 high point in the next decade. About 80% of Mirvac’s earnings come from a predictable commercial property portfolio, more than half of which is office and another fourth in retail, a small industrial portfolio, and a fledgling build-to-rent residential portfolio. The company is allocating more capital to passive property ownership, and within that, trimming retail exposure and adding office, industrial, and residential.

(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.

Categories
Dividend Stocks

No Change To Our Fair Value Estimate For Royal Bank Of Canada After Second-Quarter Earnings

Business Strategy & Outlook:   

It is expected that Royal Bank of Canada will remain a steady player in its retail and commercial Canadian banking operations. It also remains a major player in global capital markets. It is expected that this segment will continue to be a strong contributor to net income, and if anything, capital markets have been countercyclical for the bank during the pandemic as earnings have soared for the unit. The wealth-management segment also earns strong returns on equity, and large inflows have led to a top market position. RBC remains a top asset manager and gatherer in Canada, and is also experiencing outsize growth from City National, where cross-selling and client integration efforts have gone well. The banks’ distribution networks are arguably the most dominant in Canada, and the bank has the largest amount of assets under management among the Canadian banks. 

 RBC’s growth strategy in the U.S. through City National, focusing on wealth and commercial clients. The company believes this is a much more focused strategy than its previous attempts at growth in the U.S., and it is paying dividends. We think the bank has additional room for outsize growth as CNB grows and as the bank invests in additional wealth and investment banking staff. With the initial COVID-19-driven downturn in the past, 2021 turned into a year of recovery in profitability and lower-than-expected credit costs. So far, 2022 is showing a continuation of the positive credit environment and rate hikes are going to help net interest income, but fee growth is starting to slow.

Financial Strengths:  

 Royal Bank of Canada is seen as being in a strong overall financial health and do not believe any potential future issues will be an existential risk to the bank. The Canadian housing market is worth monitoring, but from company’s point of view this is more of a risk to the future growth rather than a major credit risk. According to the company RBC’s reported common equity Tier 1 ratio of 13.2% as of April 2022 remains satisfactory, arguably even representing overcapitalization. The bank also maintains one of the highest credit ratings (along with Toronto Dominion) of the big six banks. With its dividend payout ratio generally at a manageable levels in the mid-40s in a normal year, it is expected that the capital generation will continue to provide growth in its capital position, leaving room for future acquisitions or increased capital return to shareholders.

Bulls Say: 

  • Royal Bank of Canada’s worldwide scope in capital markets and wealth management provides a powerful and diversified stream of revenue. The ETF partnership with BlackRock further solidifies RBC’s overall dominance in financial services. This should lead to outsize fee income versus peers. 
  • The strength in its Canadian banking business, where returns on equity exceed 30%, should continue for some time. 
  • RBC’s latest expansion into the U.S. high-net-worth and commercial banking space should provide additional high-margin growth for the bank.

Company Description:  

Royal Bank of Canada is one of the two largest banks in Canada by assets and one of six that collectively hold roughly 90% of the nation’s banking deposits. The bank derives two thirds of its revenue from Canada, with the rest primarily coming from the United States. It has done an admirable job of expanding its nonbank lines of business, running efficient banking operations, and generating some of the best returns for shareholders in the industry. The company believes RBC should remain one of the dominant Canadian banks for years to come, even as a more difficult macro backdrop pressures earnings growth in the medium term.

(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.

Categories
Daily Report Financial Markets

European Market Outlook – 31 May 2022

European-Market-Outlook-31-May-2022Download

Categories
Daily Report Financial Markets

Indian Market Outlook – 31 May 2022

Indian-Market-Outlook-31-May-2022Download