Business Strategy and Outlook
Jack Henry remains committed to the idea that slow and steady wins the race. While its larger peers both completed big mergers in 2019 that expanded their operations into new areas, Jack Henry continues to build out its competitive position organically. Overall, this approach should allow Jack Henry to maintain its wide moat and continue to modestly outperform its larger peers.
The company has not been without challenges recently. Jack Henry’s business is quite stable, with much of its revenue recurring under long-term contracts and related to essential services for banks and credit unions. Jack Henry and its peers saw only a modest impact from the financial crisis in 2008, which is to be believed was essentially a worst case for the industry from a macro perspective. However, growth stalled a bit as banks looked to reduce spending during the pandemic. But much of the decline in growth has come from a falloff in deconversion fees, given that M&A activity among banks declined significantly due to the uncertainty created by COVID-19. These fees fall almost entirely to the bottom line, and as such can have an outsize impact on margins and profitability. However, while this weighed on recent results, from a long-term perspective, holding onto more clients can only be construed as a positive. Management’s guidance for fiscal 2022 suggests a full return to normalized growth, and the stage seems set for this to occur
Jack Henry has generally outperformed its larger peers in terms of growth, and expect this to continue. The company notched up over 40 competitive core takeaways in fiscal 2021, suggesting that it continues to pick up incremental share, although the high switching costs around this service make this a very slow process. On the negative side, margins have been under some pressure recently as the company developed and migrated clients to a new card processing platform. Jack Henry’s competitive position is a little weaker on this side, given its relative lack of scale, but at this point see this is a one-time issue and margins should rebound now that this initiative is complete.
Financial Strength
Jack Henry’s balance sheet is strong. Historically, the company has generally carried no or just a nominal amount of debt, and it had only $100 million in debt at the end of fiscal 2021. The company’s conservative balance sheet structure, along with the underlying stability of the business, creates significant flexibility in terms of returning capital to shareholders. While the company does pursue acquisitions, historically these have been limited to small, bolt-on deals that can be covered with free cash flow. Most of the company’s free cash flow is returned to shareholders, with dividends and share buybacks equating to about 90% of free cash flow over the past five years.
Bulls Say’s
- The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts.
- Jack Henry’s organic approach to growth has allowed the company to build out a relatively streamlined set of products, which allows the company to concentrate its resources and maintain relatively strong margins.
- Jack Henry has outperformed its larger peers in terms of organic growth over time, suggesting the company is steadily improving its share.
Company Profile
Jack Henry is a leading provider of core processing and complementary services, such as electronic funds transfer, payment processing, and loan processing for U.S. banks and credit unions, with a focus on small and midsize banks. Jack Henry serves about 1,000 banks and 800 credit unions.
(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
At its core, J.B. Hunt is an intermodal marketing company; it contracts with the Class I railroads for the line-haul movement of its domestic containers. It was one of the first for-hire truckload carriers to venture into intermodal shipping, forming a partnership with Burlington Northern Santa Fe in the West in 1990. Years later, it struck an agreement with Norfolk Southern in the East. Hunt has established a clear leadership position in intermodal shipping, with a 20%-plus share of a $22 billion-plus industry. The next-largest competitor is Hub Group, followed by Schneider National’s intermodal division and XPO Logistics’ intermodal unit. Intermodal made up slightly less than half of Hunt’s total revenue in 2021.
Hunt isn’t immune to downturns, but over the past decade-plus it’s reduced its exposure to the more capital-intensive truckload-shipping sector, which represents about 28% of sales (including for-hire and dedicated-contract business) versus 60% in 2005. Hunt is also shifting its for-hire truckload division to more of an asset-light model via its drop-trailer offering while investing meaningfully in asset-light truck brokerage and final-mile delivery.
Rates in the competing truckload market corrected in 2019, driving down intermodal’s value proposition relative to trucking. Thus, 2019 was a hangover year and fallout from pandemic lockdowns pressured container volume into early 2020. However, truckload capacity has since tightened drastically, contract pricing is rising nicely across all modes, and underlying intermodal demand has rebounded sharply on the spike in retail goods consumption (intermodal cargo is mostly consumer goods) and heavy retailer restocking. Hunt is grappling with near-term rail network congestion that’s constraining volume growth, but the firm is working diligently with the rails and customers to minimize the issue. The expectation is that 2.5%-3.0% U.S. retail sales growth and conversion trends to support 3.0%-3.5% industry container volume expansion longer term, with 2.0%-2.5% pricing gains on average, though Hunt’s intermodal unit should modestly outperform those trends given its favorable competitive positioning.
Financial Strength
J.B. Hunt enjoys a strong balance sheet and is not highly leveraged. It had total debt near $1.3 billion and debt/EBITDA of about 1 time at the end of 2021, roughly in line with the five-year average. EBITDA covered interest expense by a very comfortable 35 times in 2021, and expect Hunt will have no problems making interest or principal payments during our forecast period. Hunt posted more than $350 million in cash at the end of 2021, up from $313 million at the end of 2020. Historically, Hunt has held modest levels of cash, in part because of share-repurchase activity and its preference for organic growth (including investment in new containers and chassis, for example) over acquisitions. For reference, it posted $7.6 million in cash and equivalents at the end of 2018 and $14.5 million in 2017. The company generates consistent cash flow, which has historically been more than sufficient to fund capital expenditures for equipment and dividends, as well as a portion of share-repurchase activity. It is expected that trend to persist. Net capital expenditures will jump to $1.5 billion in 2022 as the firm completes its intermodal container expansion efforts, but after that it should also have ample room for debt reduction in the years ahead, depending on its preference for share buybacks. Overall, Hunt will mostly deploy cash to grow organically, while taking advantage of opportunistic tuck-in acquisitions (a deal in dedicated or truck brokerage isn’t out of the question, but and suspect the final mile delivery niche is most likely near term).
Bulls Say’s
- Intermodal shipping enjoys favorable long-term trends, including secular constraints on truckload capacity growth and shippers’ efforts to minimize transportation costs through mode conversions (truck to rail).
- It is believed that the intermodal market share in the Eastern U. S. still has room for expansion, suggesting growth potential via share gains from shorter-haul trucking.
- J.B. Hunt’s asset-light truck brokerage unit is benefiting from strong execution, deep capacity access, and tight market capacity. It’s also moved quickly in terms of boosting back-office and carrier sourcing automation.
Company Profile
J.B. Hunt Transport Services ranks among the top surface transportation companies in North America by revenue. Its primary operating segments are intermodal delivery, which uses the Class I rail carriers for the underlying line-haul movement of its owned containers (45% of sales in 2021); dedicated trucking services that provide customer-specific fleet needs (21%); for-hire truckload (7%); heavy goods final-mile delivery (6%), and asset-light truck brokerage (21%).
(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
Jack Henry remains committed to the idea that slow and steady wins the race. While its larger peers both completed big mergers in 2019 that expanded their operations into new areas, Jack Henry continues to build out its competitive position organically. Overall, it is seen this approach should allow Jack Henry to maintain its wide moat and continue to modestly outperform its larger peers.
The company has not been without challenges recently. Jack Henry’s business is quite stable, with much of its revenue recurring under long-term contracts and related to essential services for banks and credit unions. Jack Henry and its peers saw only a modest impact from the financial crisis in 2008, which is likely was essentially a worst case for the industry from a macro perspective. However, growth stalled a bit as banks looked to reduce spending during the pandemic. But much of the decline in growth has come from a falloff in deconversion fees, given that M&A activity among banks declined significantly due to the uncertainty created by COVID-19. These fees fall almost entirely to the bottom line, and as such can have an outsize impact on margins and profitability. However, while this weighed on recent results, from a long-term perspective, holding onto more clients can only be construed as a positive. Management’s guidance for fiscal 2022 suggests a full return to normalized growth, and the stage seems set for this to occur.
Jack Henry has generally outperformed its larger peers in terms of growth, and is believed for this to continue. The company notched up over 40 competitive core takeaways in fiscal 2021, suggesting that it continues to pick up incremental share, although the high switching costs around this service make this a very slow process. On the negative side, margins have been under some pressure recently as the company developed and migrated clients to a new card processing platform. It is held Jack Henry’s competitive position is a little weaker on this side, given its relative lack of scale, but at this point see this is a one-time issue and margins should rebound now that this initiative is complete.
Financial Strength
Jack Henry’s balance sheet is strong. Historically, the company has generally carried no or just a nominal amount of debt, and it had only $100 million in debt at the end of fiscal 2021. The company’s conservative balance sheet structure, along with the underlying stability of the business, creates significant flexibility in terms of returning capital to shareholders. While the company does pursue acquisitions, historically these have been limited to small, bolt-on deals that can be covered with free cash flow. Most of the company’s free cash flow is returned to shareholders, with dividends and share buybacks equating to about 90% of free cash flow over the past five years.
Bulls Say’s
- The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts.
- Jack Henry’s organic approach to growth has allowed the company to build out a relatively streamlined set of products, which allows the company to concentrate its resources and maintain relatively strong margins.
- Jack Henry has outperformed its larger peers in terms of organic growth over time, suggesting the company is steadily improving its share.
Company Profile
Jack Henry is a leading provider of core processing and complementary services, such as electronic funds transfer, payment processing, and loan processing for U.S. banks and credit unions, with a focus on small and midsize banks. Jack Henry serves about 1,000 banks and 800 credit unions.
(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
Since taking the helm at Mondelez four years ago, CEO Dirk Van de Put has orchestrated a plan to drive balanced sales and profit growth by empowering local leaders, extending the distribution of its fare, and facilitating more agility as it relates to product innovation (aims that are hitting the mark). It wasn’t surprising reigniting the top line was at the forefront of its strategic direction. More specifically, Mondelez targets 3%-plus sales growth long term as it works to sell its wares in more channels and reinvests in new products aligned with consumer trends at home and abroad. Further, it has looked to acquire niche brands to build out its category and geographic exposure, which is seen to be prudent.
But despite opportunities to bolster sales, it weren’t anticipated the pendulum to shift entirely to top-line gains under Van de Put’s watch; rather, based on his tenure at privately held McCain Foods and past rhetoric, it is alleged driving consistently profitable growth would be the priority. As such, the suggestion showcase that Mondelez is poised to realize additional efficiency gains through fiscal 2022 favorably. While management has refrained from quantifying its cost-saving aims, it is seen an additional $750 million in costs (a low- to mid-single-digit percentage of cost of goods sold and operating expenses, excluding depreciation and amortization) it could remove (on top of the $1.5 billion realized before the pandemic). It is foreseen this can be achieved by extracting further complexity from its operations, including rationalizing its supplier base, parting ways with unprofitable brands, and continuing to upgrade its manufacturing facilities.
It isn’t likely that, these savings to merely boost profits, though. In this vein, management has stressed a portion of any savings realized would fuel added spending behind its brands in the form of research, development, and marketing, supporting the brand intangible asset underpinning Mondelez’s wide moat. This aligns with analysts forecast for research, development, and marketing to edge up to nearly 7% of sales on average over the next 10 years (or about $2.4 billion annually), above historical levels of 6% ($1.7 billion).
Financial Strength
In assessing Mondelez’s balance sheet strength, it isn’t foreseen any material impediments to its financial flexibility. In this vein, Mondelez maintained $3.5 billion of cash on its balance sheet against $19.5 billion of total debt as of the end of fiscal 2021. Experts forecast free cash flow will average around 15% of sales annually over Experts 10-year explicit forecast (about $5.2 billion on average each year). And it is in view that returning excess cash to shareholders will remain a priority. Analysts forecast Mondelez will increase its shareholder dividend (which currently yields around 2%) in the high-single-digit range on average annually through fiscal 2031 (implying a payout ratio between just north of 40%), while also repurchasing around 2%-3% of shares outstanding annually. It is held Mondelez has proven itself a prudent capital allocator and could also opt to add on brands and businesses that extend its reach in untapped categories and/or geographies from time to time–although it is unlikely believe it has much of an appetite for a transformational deal. It is alleged the opportunity to expand its footprint into untapped markets–such as Indonesia and Germany–or into other adjacent snacking categories (like health and wellness) could be in the cards. Recent deals have included adding Tate’s Bake Shop for $500 million in 2018, Perfect Snacks (in 2019, refrigerated snack bars), Give & Go (2020, an in-store bakery operator),and Chipita (2021, Central and Eastern European croissants and baked goods) to its fold. But at just a low-single-digit percentage of sales, none of these deals are material enough to move the needle on its overall results.
Bulls Say’s
- Mondelez’s decision to empower in-market leaders and fuel investments behind its local jewels (which historically had been starved in favor of its global brands) stands to incite growth in emerging markets for some time.
- Experts suggest the firm is committed to maintaining a stringent focus on extracting inefficiencies from its business, including the target to shed more than 25% of its noncore stock-keeping units to reduce complexity.
- Management has suggested it won’t sacrifice profit improvement merely to inflate its near-term sales profile, which is foreseen as a plus.
Company Profile
Mondelez has operated as an independent organization since its split from the former Kraft Foods North American grocery business in October 2012. The firm is a leading player in the global snack arena with a presence in the biscuit (47% of sales), chocolate (32%), gum/candy (10%), beverage (4%), and cheese and grocery (7%) aisles. Mondelez’s portfolio includes well-known brands like Oreo, Chips Ahoy, Halls, Trident, and Cadbury, among others. The firm derives around one third of revenue from developing markets, nearly 40% from Europe, and the remainder from North America.
(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
- Based on blended valuation (consisting of DCF, PE-multiple & EV/EBITDA multiple), BHP is trading at fair value but on an attractive dividend yield.
- Commodities prices especially iron ore prices deteriorate on lower demand from China.
- Focus on returning excess free cash flow to shareholders in the absence of growth opportunities (hence the solid dividend yield).
- Quality assets with competitive cost structure and leading market position.
- Growth in China outperforms market expectations.
- Management’s preference for oil and copper in the medium to long-term.
- Solid balance sheet position.
- Ongoing focus on productivity gains.
Key Risks
- Poor execution of corporate strategy.
- Prolonged impact on demand if coronavirus is not contained.
- Deterioration in global macro-economic conditions.
- Deterioration in global iron ore/oil supply & demand equation.
- Deterioration in commodities’ prices.
- Production delay or unscheduled site shutdown.
- Movements in AUD/USD.
1H22 Results Highlights Relative to the pcp:
- Earnings and Margins: Attributable profit of US$9.4bn includes an exceptional loss of US$1.2bn (which mainly accounts for Samarco dam failure of US$821m as well as an impairment of US deferred tax assets no longer expected to be recoverable after the Petroleum demerger of US$423m). This was significantly above 1H21 profit of US$3.9bn, which included an exceptional loss of US$2.2bn. Underlying attributable profit of US$10.7bn was much improved from US$6.0bn in the pcp. Profit from operations (continuing operations) of US$14.8bn was up +50%, due to higher sales prices across BHP’s major commodities, near record production at WAIO and higher concentrate sales at Spence, and favourable exchange rate movements; partially offset by impacts of planned maintenance across several assets, expected copper grade decline at Escondida, significant wet weather at Queensland Coal and inflationary pressures, including higher fuel, energy and consumable prices. Total Covid impacts was US$223m (pre-tax) versus US$405m in 1H21. Underlying EBITDA (continuing operations) of US$18.5bn, was up +33%, as margin of 64% improved from 60% in 1H21. Underlying return on capital employed improved to 39.5% from 23.6% in 1H21 (underlying return on capital employed, excluding Petroleum, is ~42.9%).
- Costs. BHP’s FY22 unit cost guidance for WAIO and Escondida remains unchanged whilst for Queensland Coal, it was increased, reflecting lower expected volumes for the full year as previously announced. At 1H22, unit costs at WAIO are below guidance and are tracking towards the lower end of the guidance range. WAIO unit costs (C1) excluding third party royalties, were 18% higher at US$14.74 per tonne, driven by higher diesel prices and costs relating to South Flank ramp up. Escondida unit costs were at the top end of the guidance range, driven by planned lower concentrator feed grade. Queensland Coal unit costs are tracking above the revised guidance range as BHP saw lower volumes due to significant wet weather impacts and labour constraints.
- Balance Sheet: BHP’s balance sheet remains strong with gearing of 10.0% versus 6.9% in the pcp, and with net debt at US$6.1bn versus US$4.1bn in the pcp. The increase of US$2.0bn in net debt reflects strong free cash flow generation, offset by the record final dividend paid to shareholders in September 2021 of US$10.0bn. Following a review of the net debt target, BHP also revised the range to between US$5-15bn from the previous target range of between US$12-17bn.
- Dividends: The Board declared a record interim dividend of US$1.50 per share or US$7.6bn, including an additional US$2.7bn above the minimum payout policy. This equates to 78%.
- Capex: Capex of US$3.7bn in 1H22 covers US$1.1bn maintenance expenditure, US$0.1bn minerals exploration and US$0.8bn petroleum expenditure. BHP expects FY22 capital and exploration expenditure of ~US$6.5bn (continuing operations), which is US$0.2bn lower than previous guidance due to favourable exchange rate movements.
Company Profile
BHP Group Limited (BHP) is a diversified global mining company, with dual listing on the London Stock Exchange and Australia Stock Exchange. The company’s principal business lines are mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel and copper concentrate. The company also has petroleum exploration, production and refining.
(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.
Investment Thesis
- Improving underlying conditions, although some uncertainty remains.
- Solid portfolio across Retail, Office and Logistics but short-term risk around valuations and property fundamentals due to Covid-19.
- Diversified with Funds Management business generating income.
- Balance sheet strength with gearing ratio at 28.2%, well within target range of 25-35%.
- Strong tenant demand for the GPT east coast assets.
Key Risks
- Breach of debt covenants.
- Inability to repay debt maturities as they fall due.
- Deterioration in property fundamentals, especially delays with developments.
- Environment of expected interest rate hikes.
- Downward asset revaluations.
- Retailer bankruptcies and rising vacancies.
- Outflow of funds in the Funds Management business reducing GPT’s income.
- Tenant defaults as the economic landscape changes.
1H22 results summary. Relative to the pcp:
- Funds from Operations (FFO) of $554.5m was flat over pcp, despite the Company continuing to provide Covid-19 rent relief to tenants, with a +3.6% YoY increase in Retail, +11% increase in Logistics and +2.3% increase in Funds Management combined with -17% YoY decline in finance costs were offset by -4.5% YoY decline in Office and +80.4% YoY increase in corporate overheads due to not having the benefit of pcp savings from the withdrawal of bonus schemes and the support of JobKeeper. FFO per security increased +1.2% to 28.82 cents, driven by on-market security buy-back.
- NPAT improved to $1,422.8m (vs loss of $213.2m in pcp), driven by investment property valuation increases of $924.3m (vs valuation declines of $712.5m in pcp), with 60% of coming from the Logistics portfolio and the balance from Office portfolio.
- Total 12-month return was 14.1% vs -2.4% in pcp, amid investment property revaluation gains, driving an increase in NTA per stapled security of +9.3% YoY to $6.09.
- Operating cashflow increased +7.2% YoY to $520.4m and FCF grew +6.7% to $467.5m, resulting from higher cash collections and no payment for variable remuneration schemes, partially offset by higher transaction costs and taxation payments.
Capital management:
- Strong shareholder returns with the Board buying back ~32.3 million securities (1.7% of securities on issue) at an average price of $4.54 per security for a total consideration of $146.8m (on-market security buy-back program formally concluded).
- The Company declared a final distribution of 9.9cps, taking FY21 distribution to 23.2cps, up +3.1% over pcp and representing a distribution payout of 95.1% of FCF.
- Ample liquidity with $934.7m held in cash and undrawn bank facilities.
- Well managed debt profile with weighted average cost of debt down -70bps over pcp to 2.4%, with modest increase expected in FY22 because of potential interest rate increases.
- Gearing increased by +500bps to 28.2% YoY (well within gearing range of 25-35%) primarily driven by debt funded acquisition of the Ascot Capital portfolio, resulting in S&P/Moody’s rating of A (negative)/A2 (stable) vs A (stable)/A2 (stable) in pcp, within GPT’s target A-rating band.
Company Profile
GPT Group (GPT) owns and manages a portfolio of high-quality Australian property assets, these include Office, Business Parks and Prime Shopping Centres. Whilst the core business is focused around the Retail, Office and Logistics, it also has a Funds Management (FM) business that generates income for the company through funds management, property management and development management fees. GPT’s FM business has the following funds, GPT Wholesale Office Fund (GWOF – A$6.1b) launched in July 2006, GPT Wholesale Shopping Centre Fund (GWSCF – A$3.9b) launched in March 2007 and GPT Metro Office fund (GMF – A$400m) launched in 2014.
(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.