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Henkel’s CEO Carsten Knobel updated the company’s midterm ambition following the announcement of the customer unit formation

Post author By lvc-admin
Post date May 2, 2022
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Business Strategy and Outlook

In January 2022, Henkel announced the decision to combine two of its business units (beauty care, and laundry and home care) into one consumer unit in an attempt to achieve more synergies in its customer and channel execution after years of subpar performance, especially in North America. While it is held that operating an overall larger portfolio is important in driving customer management, it is probable to have limited upside in terms of growth as there is little marketing and innovation expertise to be shared between the units. Moreover, large competitors in the space are moving in the opposite direction, with Unilever for instance recently announcing that it would move from three divisions to five business groups, with each responsible for end-to-end strategy and execution.

Nonetheless, Henkel’s CEO Carsten Knobel updated the company’s midterm ambition following the announcement of the customer unit formation. The firm now targets midterm organic sales growth of 3%-4%, up from 2%-4% previously, along with mid- to high-single-digit adjusted EPS growth at constant currencies, free cash flow expansion, and an adjusted EBIT margin of 16%. Notably, this level of adjusted EBIT margin falls below the peak level of 18% achieved in 2018, signalling that management is recognizing that some of the recent higher investment in marketing and innovation would not be temporary, with limited margin opportunities remaining. Given the firm’s track record, it is projected a 16% medium-term adjusted EBIT would imply an improvement in competitiveness in the consumer space, which is not seen to be likely, at this time. That applies to the top line as well, and it is alleged that the measures announced thus far do not warrant an increase in growth expectations. In order to hit its midterm ambitions, it is grasped that more drastic portfolio decisions must be made, which should include further trimming of the brand portfolio, a clear plan to address the underperformance in North America and in the beauty care segment, as well as providing more clarity regarding the adhesive’s unit, which has been overlooked to some extent and unjustly punished for underperformance on the consumer side.

Financial Strength

Henkel has a strong balance sheet, and it has historically been run with very conservative levels of leverage. Even at the time of the acquisition of the Sun Products corporation in 2016, which was financed with debt, debt/EBITDA only increased to about 1 time. It has remained fairly stable at around 1 time since then, with net debt/EBITDA declining, averaging around 0.5 times over the last 5 years, significantly below large-cap consumer staples peers for which the average is closer to 2.0 times. Acquisitions have declined in importance since the Sun Products purchase, but remain an integral part of management’s stated strategy. To this point, one of the reasons given for the formation of the Henkel Consumer Brands segment was to enable the company to step up its active portfolio management, both in terms of divestment or discontinuations of noncore brands and businesses, and by creating a stronger basis for acquisitions across the consumer space. The restructuring of the business will only be completed in 2023, so it is unlikely to see a massive transformative initiative until at least 2024. In the absence of acquisitions, however, Henkel is unlikely to need to raise capital, and even given experts’ unambitious mid-single-digit estimate of EBITDA growth over analysts’ five-year forecast period should ensure that the net debt/EBITDA ratio remains controlled for the foreseeable future, all else equal.

Bulls Say’s

The combination of the beauty care and the home care segments under one roof in the consumer segment should result in more rapid and material portfolio decisions.
Henkel offers plenty of balance sheet optionality and should be able to pursue targets ranging from bolt-on to transformative.
Henkel’s clear market leadership in adhesives technologies through its differentiated and customizable offering gives it a unique position to benefit from secular trends around lighter yet strong materials and energy efficiency.

Company Profile

Two distinct customer groups comprise Henkel. The consumer segment (around 50% of consolidated 2021 sales) is laundry and home care, including the Persil and Purex laundry detergent brands, and beauty care, including the Schwarzkopf brand in hair care, and the Dial brand in hand soap. The adhesives technologies segment makes up the remaining 50% of sales. Sales from Western Europe accounted for 30% of the firm’s consolidated total in 2021, while Asia-Pacific and North America accounted for 17% and 25%, respectively.

(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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Global stocks

Increased focus from management on digitalization as Beiersdorf lags its peers in terms of its share of digital sales

Post author By lvc-admin
Post date May 2, 2022
No Comments on Increased focus from management on digitalization as Beiersdorf lags its peers in terms of its share of digital sales

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Business Strategy and Outlook

Beiersdorf’s strategy, C.A.R.E.+, focuses on three key growth drivers: skincare prioritization, white-space penetration, and an acceleration of digital transformation. Vincent Warnery, the new CEO appointed in May 2021, has emphasized his continued support for the strategy, having been part of Beiersdorf’s executive board at the time it was introduced in 2019. In the past few years, Beiersdorf has put the strategy into action by focusing its innovation program on the skincare category, with an emphasis on facial care, as the fastest-growing subcategory. It is anticipated for this strategy to be wise, given that the facial care segment features both faster growth and higher margins than the body care segment, in which Beiersdorf, and its flagship brand Nivea, have been historically over-indexed.

Nivea is a EUR 4 billion brand and accounts for about two thirds of the sales in the consumer segment and over half of the group sales. The brand has a long history in Europe and is the largest brand in skincare globally, albeit in a highly fragmented market. Under Warnery, the business is moving toward a more centrally driven model, with a newly appointed global head of Nivea being responsible for all the branding decisions, allowing markets to focus on execution rather than adaptation of communication or brand strategy. However, it is alleged cohesiveness in marketing, repositioning to faster growing segments, and investments in digital are still needed to bring back some of the brand’s lost lustre.

White-space penetration is another area emphasized by management as the business looks to decrease its reliance on Europe, and looks to expand its business, primarily in the U.S. and China. There is also increased focus from management on digitalization as Beiersdorf lags its peers in terms of its share of digital sales. Given all these initiatives, it is likely for the mix to be the largest contributor to margin expansion over the medium term, while marketing and sales investment will likely remain elevated to enable the implementation of the strategy

Financial Strength

Beiersdorf has one of the strongest balance sheets among consumer staples coverage. The company held EUR 1 billion of cash as well as EUR 4.5 billion in current and non-current securities on its balance sheet at the end of 2021, while debt only amounted to EUR 0.6 billion. This translates into a net debt to EBITDA of negative 4 times, using both cash and securities. The company argues that this conservative financial policy enables management to successfully navigate periods of crisis such as those experienced during the Covid-19 pandemic. However, it is held, this level of cash may be excessive, especially since shareholder distributions have been meagre, with dividends kept flat at EUR 0.70 for over a decade and a lack of share buy-back initiatives. Holding the dividend constant, it is projected the payout ratio (using net income) will decrease from 25% in 2021 to just 14% in five years. Leveraging up to 2 times debt/EBITDA, including cash and securities and the more than 2 EUR billion that Beiersdorf holds in treasury stock, could finance a transformative deal through cash of up to EUR 8 billion. However, given the company’s clear preference for conservative balance sheet management, it is not probable that there will be a significant appetite for a large deal, with management continuing to pursue bolt-on acquisitions and small deals in areas that complement the strategy of expanding their presence in skincare, such as the recent Chantecaille acquisition.

Bulls Say’s

Beiersdorf’s clear focus on skincare and the efforts to reposition Nivea into facial care has the potential to pay out in both superior growth and improved margin over the midterm.
The move toward a centrally managed model should benefit the business, with more cohesive marketing and increased digital investment helping to rejuvenate Nivea.
With its low cost of financing, cash and securities of EUR 5.5 billion, slowing global organic growth, and highly fragmented categories, it is likely, Beiersdorf will eventually be involved in industry consolidation.

Company Profile

Beiersdorf is a Germany-based company engaged in producing personal-care products, with a focus on manufacturing cosmetic products. The company operates through two business segments. Consumer provides skincare and beauty care products and operates portfolio brands such as Nivea, Eucerin, La Prairie, Labello, Hansaplast, Elastoplast, and Florena. The other business segment markets self-adhesive system and product solutions, primarily for industrial customers, under the Tesa brand. Beiersdorf is majority-owned by Maxingvest.

(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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Daily Report

Morning Report Global Markets Update – 02 May 2022

Post author By Aayushi Swami
Post date May 2, 2022
No Comments on Morning Report Global Markets Update – 02 May 2022

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ETFs ETFs

BlackRock iShares Enhanced Cash ETF: A diversified Portfolio of higher-yielding high Quality Short-term Money Market Instrument.

Investment Objective

The Fund seeks, by employing a passive investment strategy, to outperform the S&P/ASX Bank Bill Index (before fees and expenses). It offers the ability to achieve potentially enhanced regular income with a diversified portfolio of higher-yielding high quality short-term money market instruments, including floating rate notes. It is truly liquid and only holds instruments that can be easily sold to meet investor requirements.

Investment Strategy

The Fund seeks to achieve its objective by employing a passive investment strategy that aims to outperform the performance of the S&P/ASX Bank Bill Index (referred to in this section 6 of the PDS as the Index). Given the synthetic nature of Index constituents (refer to section 6.4 of this PDS, titled “About the Index” for further information) it is not possible to implement an investment strategy that looks to construct a portfolio of Index constituents. Instead, the Fund’s conservatively managed passive investment strategy will construct a portfolio of money market and fixed income securities that typically provide higher yield without significant increase in default and interest rate risk. Securities will be selected with consideration to the security’s rating, sector, maturity, liquidity, and underlying credit fundamentals.

The Fund will be managed using a buy and hold investment philosophy, similar to other passive investment strategies, with full daily portfolio transparency. A sampling methodology has been selected as the most appropriate investment technique, as it keeps trading costs to a minimum and provides the necessary flexibility to deliver investment returns that either meet or at times may exceed Index returns. Any outperformance of the Index will not be a result of active trading nor the investment expertise of the individual fund manager(s) in selecting particular investment securities that it considers will perform better relative to other securities. Rather, returns above the Index would typically result from prudent risk mitigation and diversification measures, including:

► issuer diversification, for example, rather than having issuer concentration to the four major Australian banks, diversification can be achieved by investing in similarly rated authorised deposit taking institutions (ADIs) who issue securities at a margin above the benchmark BBSW rates (the rates provided by the major Australian banks) ‐ the overarching investment consideration is prudent risk management and credit risk mitigation and not active security selection by the individual fund manager(s) based on perceived credit quality, as the credit quality is the same; and
► investment of up to 20% in Floating Rate Notes (FRNs) which earn a higher yield relative to very short‐term “cash‐like” securities ‐ these investments will be “buy and hold” and not actively traded, the overarching investment rationale for holding these securities is to further diversify credit risk in the portfolio. The Fund is also expected to attract additional returns from attractive interest rates on Australian dollar cash deposits. The interest rate on cash deposits will most likely exceed the 24-hour Cash Rate that is used as a price input into the Index return calculation, as BlackRock has long

established commercial relationships with several Australian ADIs, which allows cash to be placed on deposit at commercial rates.

Cash deposits are not actively traded; rather allocations will be based on issuer concentration limits, therefore further diversifying the portfolio.

Trading within the Fund is only expected to meet client flows or the reinvestment of maturating securities and not as a result of active security selection. The credit quality, liquidity risk and maturity profile of the Fund will be continuously monitored and adjusted with reference to the Index. Additionally, investments of the Fund are required to have a long‐term credit rating of BBB or higher or a short‐term credit rating of A2 or higher by S&P Ratings or an equivalent rating from Moody’s. Further details of the Fund’s investment strategy, including investment parameters, is set out in the Fund’s Investment Guidelines, which is available upon request. Given the Fund is unable to implement a traditional full replication or optimisation passive investment strategy, the Fund may at times incur greater tracking error than other ETFs (refer to the section of this PDS titled “Fund risks” for further information on the risks associated with investing in the Fund).

Performance:

Asset Allocation:

People:

About the Index:

The Index offers short‐term exposure to Australian dollar‐ denominated bank bills with maturity profiles of up to 91 days. Unlike traditional equity and fixed income indexes, the constituents of which are shares and bonds respectively, the Index consists of synthetic “securities” that cannot be purchased and sold. The constituents of the Index are a series of 13 hypothetical weekly bills, ranging from one‐week to 91 days in maturity that are interpolated using the 24-Hour Cash Rate and the 30‐Day, 60‐Day and 90‐Day Bank Bill Swap rates (BBSW). The credit worthiness of the bills included in the Index is deemed that of prime banks, i.e., the major four Australian banks. The 13 rates are derived from the four rate types described above and applied to each of the 13 hypothetical bills. As the Index progresses to the next weekly rebalancing date the term to maturity of each bill, and the Index as a whole, reduces daily until the shortest bill matures. The face value of this bill is then reinvested in a new bill with a term to maturity of 13 weeks and the term to maturity of the Index increases by approximately seven days. The total amount received on maturity, that is the face value, is reinvested in the discounted value of a new 91‐day bill. The Index is maintained so that maturing bills are reinvested in the discounted value of a new 91‐day bill on the day the cash is received (each Tuesday).

About the Fund:

Ishares Enhanced Cash ETF (ISEC) offers the ability to achieve capital preservation and potentially enhanced regular income with a diversified portfolio of higher-yielding high quality short-term money market instruments, including floating rate notes. The fund Achieve capital preservation and maximise regular current income with a diversified portfolio of higher-yielding high quality short-term money market instruments, including floating rate notes.

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.