Stock Research - Investor Desk

Nexi’s Q1 Lines up With Expectations But We Lower Our Fair Value Estimate

Post author By lvc-admin
Post date May 26, 2022
No Comments on Nexi’s Q1 Lines up With Expectations But We Lower Our Fair Value Estimate

Business Strategy & Outlook

Nexi offers merchant acquiring, card issuing, and digital banking services to its clients. Through the combination and shedding of various payment assets, Nexi has created a compelling suite of offerings that are supported by durable and structural growth drivers. With its latest two large acquisitions, Nets and SIA, Nexi has also gained a wider footprint in Europe as well as stronger processing capabilities. As such, Nexi has moved from an Italian pure-play to a fully vertically integrated European payment services provider at the top of European rank tables.

Nexi still derives most of its revenue from Italy, where it holds a strong competitive position and is deeply integrated in the bank-dominated payment infrastructure. Card payment penetration, although growing, remains low in Italy, with cash transactions being the dominant form of payment. Although no one can see Italy catching up with the European average of card use anytime soon, volume growth should still be a healthy high-single-digit to low-double-digit figure, supporting both acquiring and issuing volumes as well as demand for point-of-sale terminal solutions and cards. Outside of Italy, Nexi has exposure to the Nordics, which have some of the highest card use in Europe, but also more nascent regions such as Germany and countries in Eastern and Southern Europe that offer strong organic growth opportunities. Nexi also benefits from a gradual shift from national debit schemes to international debit and credit schemes supported by Visa and Mastercard. This shift accelerating as card payments take over daily habits, which will disproportionately benefit Nexi. Nexi not only earns higher margins on international card schemes, but also has a better offering in supporting merchants and banks to switch to international schemes. Additionally, international card schemes make greater use of newer payment technologies, increasing demand for more advanced point-of-sale terminals, thereby increasing subscription-based revenue for Nexi and generating further upgrade sale cycles.

Financial Strengths

Nexi will be able to bring its net debt to EBITDA ratio down toward its medium-term target of 2.5 times by 2023. In the future, the potential large deals to be paid in shares, allowing Nexi to refinance the target’s debt at potentially lower rates, while smaller tuck-in acquisitions could be done via debt raising, if the balance sheet allows.

Bulls Say

The Italian payment market offers some of the best opportunities for payment service providers in Europe and Nexi is best-positioned to benefit from structural trends.

Consolidation of the Italian banking sector could bring further opportunities for Nexi to purchase additional bank-held merchant acquiring books.

As international card schemes become more prevalent in Italy, Nexi’s business proposition becomes increasingly valuable.

Company Description

Nexi is a payment services provider offering merchant acquiring, card issuing, and digital banking services across Europe. Nexi’s services cover the entire payment chain excluding the card scheme. It offers its acquiring and issuing services either in partnerships with banks, providing point-of-sale terminals, processing, or issuing services on their behalf or directly to merchants.

(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.

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Technology Stocks

Amadeus’ Advantaged Platform Seeing Increased Demand, Boosted by a Return of Business Travel

Post author By lvc-admin
Post date May 26, 2022
No Comments on Amadeus’ Advantaged Platform Seeing Increased Demand, Boosted by a Return of Business Travel

Business Strategy & Outlook

While Amadeus still stands to see material near-term corporate and European demand headwinds from the coronavirus and geopolitical conflict, its leadership position in global distribution systems, or GDS, to endure during the next several years, driven by its leading network of airline content and travel agency customers as well as its healthy position in software solutions for these carriers and agents. Amadeus is the largest of the three GDS operators (narrow-moat Sabre is number two, followed by privately held Travelport) that control nearly 100% of market volume.

Amadeus’ GDS enjoys a network effect (source of its narrow moat). As more supplier content (mostly airline content) is added, more travel agents use the platform; as more travel agents use the platform, suppliers offer more content. This network advantage is solidified by technology that integrates GDS content with back-office operations of agents and IT solutions of suppliers, leading to more accurate information that is also easier to book and service the end customer with. The 2016 acquisition of airline IT company Navitaire and 2018 acquisition of hotel IT company TravelClick expanded Amadeus’ GDS network advantage through new customer integration, as Navitaire focuses on low-cost carriers while the company’s existing Altea division focuses on full-service carriers, and TravelClick has a midscale lodging presence versus Amadeus’ legacy hotel offering, which focuses on enterprises. Replicating a GDS platform entails aggregating and connecting content from hundreds of airlines to a platform that is also connected to travel agents, requiring significant costs and time. Still, although the GDS advantages as substantial, technology architechtures like that of eTraveli (set to be acquired by narrow-moat Booking Holdings in early 2022), enable end users to access not only GDS content but supply from competing platforms, which could take some volume from GDS operators. Also, GDS faces some risk of larger carriers and agencies direct connecting, although these relationships to be the exception rather than the rule.

Financial Strengths

While near-term industry travel demand remains below prepandemic marks, Amadeus’ balance sheet is clearer. Amadeus entered 2020 with just 1.4 times net debt/EBITDA, and it has enough liquidity for four years even at near zero demand levels. Amadeus has taken aggressive actions to shore up its liquidity profile. In March 2020, Amadeus began to cut costs and secured an additional EUR 1 billion one-year bridge loan, in addition to the undrawn EUR 1 billion revolver it already had. In April 2020, the company raised EUR 1.5 billion with a EUR 750 million equity offering (at a 5% discount to closing stock prices) and a EUR 750 million convertible note (at a strike price 40% above closing stock prices). In May 2020, Amadeus raised EUR 1 billion in debt at interest rates of 2.5%-2.9%. The banking partners to provide any additional needed funding, given Amadeus’ sizable network, switching costs, and efficient scale advantages that underpin its narrow moat. Net debt/EBITDA increased to 5.5 times in 2021, due to lower demand resulting from COVID-19, but a return to within management’s 1-1.5 times target range by 2023. Although about EUR 2.7 billion of the company’s EUR 4.3 billion in long-term debt matures over the next four years, its low leverage and stable transaction-based model in normal demand environments should not present any financial health concerns. The Amadeus will generate EUR 7 billion in free cash flow (operating cash flow minus capital expenditures) during 2022-26.

Bulls Say

The company’s GDS network hosts content from most airlines and is used by many travel agents, resulting in significant industry share. Replicating this network would involve meaningful time and costs.

The network advantage is supported by new products and technology that further integrate airlines and agents into its GDS platform. The company’s Navitaire, AirIT, and TravelClick acquisitions aid this expanding technology and integration reach.

The business model is driven by transaction volume and not pricing, leading to lower cyclical volatility.

Company Description

Among the top three operators, Amadeus’ 40%-plus market share in air global distribution system bookings is the largest in the industry. The GDS segment represents 56% of total prepandemic revenue (2019). The company has a growing IT solutions division (44% of 2019 revenue) that addresses the airline, airport, rail, hotel, and business intelligence markets. Transaction fees, which are tied to volume and not price, account for the bulk of revenue and profits.

(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.

Tags Street Talks

Technology Stocks

Link’s only significant competitor in fund administration is Marsh & McLennan-owned Mercer

Post author By lvc-admin
Post date May 26, 2022
No Comments on Link’s only significant competitor in fund administration is Marsh & McLennan-owned Mercer

Business Strategy and Outlook

It is considered that the Australian fund administration business, which constitutes around a third of group revenue, to be the strongest of Link’s businesses. Link usually comprises around three fourths of fund administration customer costs, which creates material operational and reputational risks to switching providers. Contract lengths of between three and five years, along with six to nine months of lead time to change provider, also create barriers to switching. Switching costs are evidenced by Link’s recurring revenue rate of around 90% and client retention rate of over 95%. Six of Link’s 10 largest clients have been with the company for over 20 years.

Link’s only significant competitor in fund administration is Marsh & McLennan-owned Mercer, which has a 10% market share following its acquisition of Pillar, previously the third-largest provider, in 2016. It is projected both companies to compete aggressively for future outsourcing contracts, which may come from the 60% of the market that is currently serviced in-house. However, around 30% of the in-house segment comprises the four major Australian banks and AMP, which have a reasonably low probability of outsourcing. The remaining 30% comprises a combination of government-owned entities and relatively small superannuation funds, which are likely to have outsourcing lead times of months or years.

Financial Strength

Link’s balance sheet is in good shape with a net debt/EBITDA ratio of around 2.6 as at Dec. 31, 2021, which is within the company’s target range of 2 to 3. From an interest coverage ratio perspective, Link has a manageable interest coverage ratio of around 14.

Bulls Say’s

It is held for, Link’s EPS to grow at a CAGR of 9% over the next decade, driven by a revenue CAGR of 6% per year, in addition to cost-cutting and operating leverage.
Experts’ base case assumes Link’s Australian fund administration market share grows by 2.5 percentage points to 32.5% over the next five years.
The capital-light nature of the business model should enable regular dividends, and low financial leverage creates the opportunity for debt-funded acquisitions.

Company Profile

Link provides administration services to the financial services sector in Australia and the U.K., predominantly in the share registry and investment fund sectors. The company is the largest provider of superannuation administration services and the second-largest provider of share registry services in Australia. Link acquired U.K.-based Capita Asset Services in 2017; this provides a range of administration services to financial services firms and comprises around 40% of group revenue. Link’s clients are usually contracted for between two and five years but are relatively sticky, which results in a high proportion of recurring revenue. The business model’s capital-light nature means cash conversion is relatively strong.

(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.

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.

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Commodities

Newcrest has strong prospects for growth through the recovery in Lihir production and from recent acquisitions

Post author By lvc-admin
Post date May 26, 2022
No Comments on Newcrest has strong prospects for growth through the recovery in Lihir production and from recent acquisitions

Business Strategy & Outlook:

Newcrest is a large, long-life gold miner, long established as a low-cost producer. Expansion of the key Lihir and Cadia Valley operations and the lower Australian dollar saw Newcrest return to the lowest quartile of the cost curve. Reserve life of more than 20 years is one of the longest of the global gold majors, implying better-than-industry-average growth prospects, potential for incremental improvements and options to extend life. Exploration success historically fueled production growth and sound returns, save the 2010 Lihir acquisition, which at the time was a misstep. Management’s subsequent focus on Lihir and Cadia has driven meaningful improvement to production and unit costs of production. Newcrest recently expanded into Canada, purchasing Brucejack to add to its 70% stake in the Red Chris copper-gold mine. It also owns a 32% stake in the high-grade, low-cost Fruta Del Norte gold mine in Ecuador.

Despite the elevated gold price and likely improved returns at both Lihir and Cadia, Newcrest shares trade below our fair value estimate. Newcrest has strong prospects for growth through the recovery in Lihir production and from recent acquisitions such as Brucejack and its 32% stake in the Fruta Del Norte mine. Newcrest is well managed under the leadership of CEO Sandeep Biswas and is likely to remain one of the world’s lowest-cost gold miners while increasing copper production.

Financial Strengths:

The company’s balance sheet is in reasonable shape. Newcrest ended December 2021 with modest net debt of USD 0.5 billion. The net debt is expected to grow to about USD 1.6 billion as at end fiscal 2022 with the acquisition of Pretium Resources and elevated capital expenditure at Cadia, Lihir and with the development of Havieron and Red Chris. However, despite the increase, the balance sheet is still sound. The net debt/EBITDA is expected to peak at around 0.8 times in fiscal 2022 before declining gradually through the remainder of our forecast period. Newcrest has long-dated corporate bonds totaling USD 1.65 billion. The bonds mature in fiscal 2030, 2042, and 2050 with maturities of USD 650 million, USD 500 million, and USD 500 million, respectively. Newcrest has significant liquidity. As at end of December 2021, the company had USD 1.2 billion of cash and USD 2.0 billion of undrawn debt.

Bulls Say:

The shares are undervalued. Newcrest is well managed and has a suite of low-cost, long-life mines, which is currently being not recognized by investors.

Gold can provide a hedge to inflation risk and offer some benefit in times of market uncertainty. Gold can gain from continued money printing and/or if there is a flight to safety.

Newcrest owns several world-scale deposits in Cadia, Telfer, Lihir, and Wafi-Golpu. Large deposits typically bring significant exp

Company Description:

Newcrest is an Australia-based gold and, to a lesser extent, copper miner. Operations are mainly in Australia and Papua New Guinea. The company also owns a 32% stake in the Fruta Del Norte gold mine in Ecuador, while the acquisition of Brucejack in 2022 adds to its 70% stake in the Red Chris mine in Canada. The company is likely to produce around 2 million ounces of gold per year over the next decade, making it one of the larger global gold producers but still only accounting for less than 2% of total supply. Cash costs are below the industry average and amongst the lowest of the global gold miners, underpinned by improvements at Lihir and Cadia. Organic growth options include its Havieron prospect, the Red Chris underground mine, and the high-grade Wafi-Golpu copper-gold prospect in PNG.

(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.

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Dividend Stocks

Link benefits from high customer switching costs and relatively low marginal costs, which underpin its narrow economic moat rating

Young woman trading stock market by touching.

Business Strategy & Outlook:

Link Administration has created a narrow economic moat in the Australian and U.K. financial services administration sectors via its leading positions in fund administration and share registry services. Client retention rates exceed 90% in both markets, underpinned by inflation-linked contracts of between two and five years. The capital-light nature of the business model should enable good cash conversion, regular dividends, and relatively low gearing. Earnings growth prospects are supported by organic growth in member numbers, industry fund consolidation, and continued outsourcing trends. The company was formed via numerous acquisitions made since 2005 under the ownership of private equity firm Pacific Equity Partners, which sold its remaining holding in the company in 2016. It is considered the Australian fund administration business, which constitutes around a third of group revenue, to be the strongest of Link’s businesses. Link usually comprises around three fourths of fund administration customer costs, which creates material operational and reputational risks to switching providers. Contract lengths of between three and five years, along with six to nine months of lead time to change provider, also create barriers to switching. Switching costs are evidenced by Link’s recurring revenue rate of around 90% and client retention rate of over 95%. Six of Link’s 10 largest clients have been with the company for over 20 years.

The corporate markets revenue grows at 3% per year, reflecting inflation, and assume no market share gains due to the strength of major competitor Computershare. The EBIT margins grow from 12% in fiscal 2021 to 21% by fiscal 2031 partly due to cost-cutting. Over the next decade, it is expected that an EPS CAGR, excluding amortization of acquired intangible assets, of 9%. The capital-light nature of the business model means cash conversion is expected to be strong, enabling dividends to be maintained and net debt gradually reduced, assuming no further acquisitions. Our discounted cash flow valuation assumes a weighted average cost of capital of 7.7%.

Financial Strengths:

Bulls Say:

It is expected Link’s EPS to grow at a CAGR of 9% over the next decade, driven by a revenue CAGR of 6% per year, in addition to cost-cutting and operating leverage.
Our base case assumes Link’s Australian fund administration market share grows by 2.5 percentage points to 32.5% over the next five years.
The capital-light nature of the business model should enable regular dividends, and low financial leverage creates the opportunity for debt-funded acquisitions.

Company Description:

(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.