Business Strategy and Outlook
While Amadeus still stands to see material near-term corporate and European demand headwinds from the coronavirus and geopolitical conflict, it is aniticipated 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 it is viewed 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 it is likely these relationships to be the exception rather than the rule.
Financial Strength
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 is projected 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%. It is alleged 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 it is foreseen 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. It is projected Amadeus will generate EUR 7 billion in free cash flow (operating cash flow minus capital expenditures) during 2022-26.
Bulls Say’s
- 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 Profile
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)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook
Following the 2008-09 financial crisis, Sun Life made several positive changes to its business operations, most notably selling its lagging U.S. life insurance and annuities business. Sun Life’s medium-term objectives include underlying EPS growth of 8%-10%, underlying return on equity of 12%-14%, and a dividend payout rate of 40%-50%. Canada and the United States continue to have several demographic trends working in favor of insurers, especially with wealth- and asset-management businesses, as an aging population increasingly looks to manage its savings. However, areas of growth remain fiercely competitive, and life insurance will remain structurally difficult, making it hard for Sun Life to maintain any excess returns. Sun Life is also focused on expanding its operations in Asia, though it is skeptical of this initiative ultimately providing significant value, given the subpar returns on equity so far.
It is also held for Sun Life to continue to invest in digital tools and apps. In 2018, Sun Life acquired Maxwell Health, a startup that offers a digital employee-benefits platform. On the distribution side, Sun Life is working to sell insurance through mobile banking apps in Asia. Sun Life has a “four-pillar” acquisition strategy in which any deal needs to meet at least one of the following: It must add scale, add capabilities, deliver lifetime return on equity with the firm’s medium-terms objective, or be accretive to earnings over a reasonable time frame. In asset management, it is alleged for more consolidation in the industry and expect Sun Life to participate. In 2019, it acquired real estate investment firm BentallGreenOak and in 2020 announced a majority stake in Crescent Capital and Infrared Capital Partners, both of which are alternative asset managers. While a large acquisition in the asset-management industry is possible, Sun Life would have to carefully weigh the capital required and the potential for disruption to its existing operations. In the insurance space, Sun Life swung big with its $2.5 billion acquisition of DentaQuest, which is expected to close midyear 2022.
Financial Strength
The life insurance business model typically entails significant leverage and potentially exposes the industry to outlier capital-market events and unanticipated actuarial changes. Sun Life was not immune to these risks and was hurt, like many of its peers, during the financial crisis. Since then, Sun Life has done a reasonably good job of reducing its debt by growing back its equity base while reducing absolute debt levels.As of Dec. 31, 2021, Sun Life has a total financial leverage ratio (the ratio of debt and preferred shares to total capital) of 25.5%, consistent with management’s long-term target of 25%. As of Dec. 31, 2020, Sun Life’s LICAT ratio was 145%. The Life Insurance Capital Adequacy Test is the sum of the available capital, surplus allowance, and eligible deposits divided by the firm’s base solvency buffer. Life Insurers in Canada must have a minimum of 90%, suggesting that Sun Life has an adequate buffer from a regulatory perspective.
Bulls Say’s
- Over the next 20 years, the retirement-age population will grow to about one in five, significantly increasing the demand for financial-protection products.
- When interest rates rise, earnings for insurers like Sun Life should increase.
- Given its strong operating margins, Sun Life’s MFS asset-management franchise should drive earnings growth during an equity market recovery.
Company Profile
Sun Life Financial is one of Canada’s Big Three life insurance companies along with Great-West Lifeco and Manulife. Sun Life provides insurance, retirement, and wealth-management services to individual and corporate customers in Canada, the United States, and Asia. It also owns MFS Investment Management, a Boston-based asset-management firm. Sun Life generates about a third of its profit from asset-management operations.
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook
Avery Dennison is the largest supplier of pressure-sensitive adhesive materials and passive radio frequency identifiers in the world. Rising consumer packaged goods penetration in emerging markets should add to label growth, while growth in omnichannel retailing will aid RFID sales at Avery Dennison.
Avery sells pressure-sensitive materials to a highly fragmented customer base that converts specialty film rolls into labels for companies such as Kraft Heinz or Amazon. The concentrated market positions of Avery and competitor UPM Reflactac give each bargaining power over their customers. The labels and graphics materials, or LGM, and industrial and healthcare materials, or IHM, segments account for roughly 74% of company revenue. They convert paper, vinyl, and adhesives into composite films that become shipping labels, automotive graphics, and special-use tapes and films. While demand for these products is stagnant in developed markets, and expect Avery’s large emerging market footprint (around 40% of revenue for these segments) to drive mid-single-digit revenue growth.
Avery’s Retail Branding and Information Systems segment, or RBIS, makes up 26% of sales and produces a mixture of apparel graphics, product tags, and passive radio frequency identifiers or RFID. While RFID accounts for around 25% of the segment’s revenue, it has grown rapidly in recent years and has increasingly become the focus of Avery’s RBIS segment. RFID products are typically integrated into product tags in industries which have both a diverse inventory and where UPC scanning is cumbersome or labour-intensive, such as apparel. Avery’s recent strategy shift to focus on reducing both costs and prices of the technology in order to gain share demonstrates the commoditized nature of these products. Even so, and think Avery will at least be able to grow with the market, or between 15% and 20% per year. The remainder of segment revenue comes from the application and production of apparel graphics and tags. It is expected expect revenue growth of these end uses to remain mixed, dependent largely on shifting fashion preferences.
Financial Strength
Avery Dennison is in very good financial health. The company ended 2021 with net debt/EBITDA of roughly 2.2, which gives the firm room to manoeuvre with regard to additional acquisitions, opportunistic share buybacks, or to boost its dividend. This remains just below management’s target range of 2.3-2.6, aimed at preserving its BBB credit rating. Avery’s target range of debt remains manageable, and shouldn’t become a material burden even if economic conditions worsen. Thanks to the amount of business Avery derives from consumer staples, cash flows usually remain relatively stable throughout the economic cycle.
Bulls Say’s
- Emerging-market adoption of consumer-packaged goods will provide a long runway for sales growth.
- As RFID technology becomes widely adopted, Avery’s growth should receive a hefty tailwind.
- Avery’s dominance in retail branding information systems should lead to widening segment margins
Company Profile
Avery Dennison manufactures pressure-sensitive materials, merchandise tags, and labels. The company also runs a specialty converting business that produces radio-frequency identification inlays and labels. Avery Dennison draws a significant amount of revenue from outside the United States, with international operations accounting for the majority of total sales.
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook
A confluence of several issues-poor relative active investment performance, the growth of low-cost index-based products, and the expanding power of the retail-advised channel–has made it increasingly difficult for active asset managers to generate organic growth, leaving them more dependent on market gains to increase their assets under management, or AUM. While we believe there will always be room for active management, we feel the advantage for getting and maintaining placement on platforms will go to those managers that have greater scale, established brands, solid long-term performance, and reasonable fees.
However, have to admit that a combination of narrow-moat Franklin Resources with no-moat Legg Mason was not even on the radar-believing both firms were more likely acquirers of smaller asset managers as opposed to either one being an acquisition target.The new Franklin provides investment management services to retail (53% of managed assets), institutional (45%) and high-net-worth (2%) clients and is one of the more global firms of the U.S.-based asset managers , with more than 35% of its AUM invested in global/international strategies and just over 25% of managed assets sourced from clients domiciled outside the U.S.
Morningstar analysts expect the Legg Mason deal to keep margins from deteriorating in the face of industrywide fee compression and rising costs (necessary to improve investment performance and enhance product distribution), near-term organic growth will struggle to stay positive (albeit better than the negative growth profile for a stand-alone Franklin).
Financial Strength
Franklin entered fiscal 2022 with $3.2 billion in principal debt (including debt issued/acquired as part of the Legg Mason deal)–$300 million of 2.8% notes due September 2022, $250 million of 3.95% notes due July 2024, $400 million of 2.85% notes due March 2025, $450 million of 4.75% notes due March 2026, $850 million of 1.6% notes due October 2030, $550 million of 5.625% notes due January 2044, and $350 million of 2.95% notes due August 2051. At the end of December 2021, the firm had $5.9 billion in cash and investments on its books. More than half of these types of assets have traditionally been held overseas, with as much as one third of that half used to meet regulatory capital requirements, seed capital for new funds, or supply funding for acquisitions. Assuming Franklin closes out the year in line with our expectations, the firm will enter fiscal 2023 with a debt/total capital ratio of around 22%, interest coverage of more than 20 times, and a debt/EBITDA ratio (by our calculations) of 1.4 times.Franklin has generally returned excess capital to shareholders as share repurchases and dividends. During the past 10 fiscal years, the firm repurchased $7.4 billion of common stock and paid out $7.1 billion as dividends (including special dividends). While Franklin’s current payout ratio of 30%-35% is lower than the 40% average payout (when excluding special dividends) during the past five years, we expect only low-single digit annual increases in the dividend until the integration of the Legg Mason deal is well behind them. As for share repurchases, Franklin spent $208 million, $219 million, and $755 million buying back 7.3 million, 9.0 million, and 24.6 million shares, respectively, during fiscal 2021, 2020, and 2019. Given the likelihood that Franklin may decide to pay off some of its debt as it comes due the next several years, we don’t expect see see a large level of share repurchases in the near term.
Bulls Say
- Franklin Resources is one of the 20 largest U.S.-based asset managers, with more than two thirds of its AUM sourced from domestic clients. It is also the fifth largest global manager of cross-border funds.
- The purchase of Legg Mason has lifted Franklin’s AUM to more than $1.5 trillion, hoisting it into the second largest tier of U.S.-based asset managers, which includes firms like Pimco, Capital Group and J.P. Morgan Asset Management.
- Franklin maintains thousands of active financial advisor relationships worldwide and has close to 1,000 institutional client relationships.
Company Profile
Franklin Resources provides investment services for individual and institutional investors. At the end of December 2021, Franklin had $1.578 trillion in managed assets, composed primarily of equity (36%), fixed-income (40%), multi-asset/balanced (10%) funds, alternatives (10%) and money market funds. Distribution tends to be weighted more toward retail investors (53% of AUM) investors, as opposed to institutional (45%) and high-net-worth (2%) clients. Franklin is also one of the more global firms of the U.S.-based asset managers we cover, with more than 35% of its AUM invested in global/international strategies and just over 25% of managed assets sourced from clients domiciled outside the United States.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Investment Thesis
- Improving sales mix towards higher grade products should continue to narrow the price discount FMG achieves to the market benchmark Platts 62% CFR Index.
- Global stimulus measures – fiscal and monetary policies – are positive for global growth and FMG’s products.
- Capital management initiatives – increasing dividends, potential share buybacks given the strength of the balance sheet.
- Strong cash flow generation.
- Quality management team.
- Continues to be on the lower end of the cost curve relative to peers; with ongoing focus on C1 cost reductions should be supportive of earnings.
Key Risks
- Decline in iron ore prices.
- Cost blowouts/ production disruptions.
- Cost out strategy fails to yield results.
- Company fails to deliver on adequate capital management initiatives.
- Potential for regulatory changes.
- Vale SA supply comes back on market sooner than expected.
- Growth projects delayed.
1H22 Results Highlights Relative to the pcp:
- FMG delivered record half year iron ore shipments of 93.1m tonnes (mt), up +3%. Revenue of US$8.1bn declined -13% per cent on 1H21. Average revenue of US$96/dry metric tonne (dmt) represented a 70% realisation of the average Platts 62% CFR Index (1H22: US$114/dmt, 90% realisation). C1 cost of US$15.28/wet metric tonne (wmt) was up +20% due to price escalation of key input costs, including diesel, other consumables and labour rates, the integration of Eliwana as well as mine plan driven cost escalation.
- Underlying EBITDA of US$4.8bn, with an Underlying EBITDA margin of 59% (-28% lower versus 1H21: US$6.6bn, 71% margin).
- NPAT of US$2.8bn was -32% lower than pcp. EPS of US$0.90 (A$1.24) was -32% weaker.
- Net cashflow from operating activities of US$2.1bn after payment of the FY21 final tax instalment of US$915m.
- Capex of US$1.5bn, inclusive of US$589m investment in the Iron Bridge growth project and the Pilbara Energy Connect decarbonisation project.
- The Board declared a fully franked interim dividend of A$0.86 per share, down -41% relative to the pcp. It equates to 70% 1H22 NPAT, and is consistent with FMG’s capital allocation framework and stated intent to target the top end of the dividend policy to payout 50 to 80% of full year NPAT.
- FMG retained a strong balance sheet with net debt of US$1.7bn at 31 December 2021, inclusive of cash on hand of US$2.9bn. FMG’s credit metrics remain strong with gross debt to last 12 months EBITDA of 0.3x and gross gearing of 23% as at 31 December 2021.
Company Profile
Fortescue Metals Group Ltd (FMG) engages in the exploration, development, production, processing, and sale of iron ore in Australia, China, and internationally. It owns and operates the Chichester Hub that consists of the Cloudbreak and Christmas Creek mines located in the Chichester Ranges in the Pilbara, Western Australia; and the Solomon Hub comprising the Firetail and Kings Valley mines located in the Hamersley Ranges in the Pilbara, Western Australia. The Company was founded in 2003 and is based in East Perth, Australia.
(Source: Banyantree)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook:
Prologis leases distribution space to some of the nation’s top retailers, and its tenant list is the strongest in the business. The continued growth in e-commerce should provide a long growth runway for distribution and logistics facilities, especially given the large amount of space necessary to support online sales compared with brick-and-mortar retail. It is difficult for industrial REITs to earn moats since supply can quickly and easily enter key cities to negate supply and demand imbalances. The aggressive construction after the financial crisis brought significant new facilities on line, and it is expected that supply will continue to grow. Although demand outpaced newly added supply for several years, supply additions have increased sharply, and company is cautious that a slowdown in consumer spending could expose the asset class, increasing vacancies, as seen in the recent downturn.
With vacancy rates hovering around historic lows in the United States and Europe and average market rent rebounding significantly since 2012, the Prologis is in the best position to benefit from incremental demand. The company’s vast portfolio surpasses all other logistics REITs in size, predominantly along coastal markets, where it more than doubles its competition. There is an undeniable shift toward tech-savvy millennial consumers, who are more likely to skip the brick-and-mortar locations and spend more time on retail websites and utilize mobile purchasing. They are also more likely to return items, which adds to the space needed to fuel the growing e-commerce distribution industry. As retailers seek additional distribution facilities closer to population centers to accommodate this trend, Prologis will tap into its deep land bank to complete lucrative developments and drive value for shareholders.
Financial Strength:
Prologis’ balance sheet has improved over the past several years, and the firm’s financial position is considered to be more in line with industry-leading REITs. It is forecasted that 2022 debt/EBITDA to be 6.0 times. This level is reasonably maintainable, with the company having completed the Industrial Property Trust acquisition with cash. Additionally, improving operating performance should help Prologis maintain this metric going forward.
As a REIT, Prologis is required to pay out at least 90% of its income as dividends to shareholders. The current dividend of $3.16 per share is more than comfortable for Prologis. In fact, it’s likely that the company will continue to tap into the debt markets as its main source of financing, given its healthy appetite for expensive developments and cheap access to capital. Management continually evaluates the portfolio and sells facilities as well as land, which allows the company to subsidize developments and not become overburdened with debt financing. It is estimated that dispositions will begin to
slow in the short term as supply continues to increase.
Bulls Says:
- Prologis has the largest portfolio of quality facilities in place and is in the best position to capitalize on e- commerce demand.
- Industrial property is the real estate subsector best positioned to weather the coronavirus outbreak- related storm.
- Prologis has an enviable tenant list, which gives investors hope for expansion and a sense security in a downturn.
Company Profile:
Prologis was formed by the June 2011 merger of AMB Property and ProLogis Trust. The company develops, acquires, and operates over 900 million square feet of high-quality industrial and logistics facilities across the globe. The company is organized into four global divisions (Americas, Europe, Asia, and other Americas) and operates as a real estate investment trust.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.