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Technology Stocks

ADAS Safety Features To Be Part Of Future Standard Equipment For Vehicles By End Of The Decade

Business Strategy and Outlook

It is alleged Aptiv’s average yearly revenue growth to exceed average annual growth in global light-vehicle demand by high-single-digit percentage points. The company provides automakers with components and systems that are in high demand from consumers and that government regulation requires to be installed. Aptiv’s high-growth technologies include advanced driver-assist systems, autonomous driving, connectivity, data services, and high-voltage electrical distribution systems for hybrids and battery electric vehicles. 

In analysts opinion, Aptiv’s ability to regularly innovate and commercialize new technologies bolsters sales growth, margin, and return on investment. A global manufacturing presence enables Aptiv to serve customers around the globe, capitalizing on the economies of scale inherent in automakers’ plans to use more global vehicle platforms. Lean manufacturing discipline and a low-cost country footprint enable more favorable operating leverage as volume increases. Aptiv enjoys relatively sticky market share, supported by highly integrated customer relationships and long-term contracts. The design phase of a vehicle program can last between 18 months and three years depending on the complexity and extent of the model redesign. The production phase averages between five and 10 years. Engineering and design for the types of products that Aptiv provides necessitate highly integrated, long-term customer relationships that are not easily broken by competitors’ attempts at market penetration. 

New Car Assessment Programs are used by governments around the world to provide an independent vehicle safety rating. Legislators, especially in the United States and in Europe, have set NCAP guidelines that will progressively require the addition of ADAS features as standard equipment through the end of this decade. If automakers intend certain models to achieve a 4- or 5-star safety rating, some ADAS features must be part of that vehicle’s standard equipment to even qualify for certain rating levels.

Financial Strength

In analysts view, Aptiv’s financial health is in good shape. Since 2015, pro forma for the spin-off of Delphi Technologies in 2017, total debt/total capital has averaged 15.2% while total debt/EBITDA has averaged 2.9 times.Most of Aptiv’s capital needs are met by cash flow from operations. However, the COVID-19 pandemic necessitated the drawdown of the company’s $2.0 billion revolver on March 23, 2020. The revolver was repaid after the company raised capital through share issuance and a mandatory convertible preferred in June 2020. Aptiv’s liquidity remains healthy at $5.6 billion, with around $3.1 billion in cash and equivalents as well as $2.0 billion in unutilized revolver and $510 million in available receivables factoring facility at the end of December 2021. The company has a debt/EBITDA covnenant ratio of 3.5 times. Aptiv’s $2.0 billion revolver expires in 2026.As of Dec. 31, 2021, Aptiv had approximately $4.1 billion in senior unsecured note principal outstanding with maturities that ranged from 2025 to 2051, at a weighted average stated interest rate of 2.8%. To fund a portion of the $4.3 billion acquisition of Wind River (remaining portion from available cash), in February 2022, Aptiv issued senior unsecured notes including $700 million at 2.396% due in 2025, $800 million at 3.250% due in 2032, and $1 billion at 4.150% due in 2052. The bonds and bank debt are all senior unsecured, pari passu, and have similar subsidiary guarantees.

Bulls Say’s

  • Owing to product segments with better-than-industry average growth prospects like safety, electrical architecture, electronics, and autonomous driving, it is likely Aptiv’s revenue to grow mid- to high-singledigit percentage points in excess of the percentage change in global demand for new vehicles. 
  • The ability to continuously innovate and commercialize new technologies should enable Aptiv to generate excess returns over its cost of capital. 
  • A global manufacturing footprint enables participation in global vehicle platforms and provides penetration in developing markets.

Company Profile 

Aptiv’s signal and power solutions segment supplies components and systems that make up a vehicle’s electrical system backbone, including wiring assemblies and harnesses, connectors, electrical centers, and hybrid electrical systems. The advanced safety and user experience segment provides body controls, infotainment and connectivity systems, passive and active safety electronics, advanced driver-assist technologies, and displays, as well as the development of software for these systems. Aptiv’s largest customer is General Motors at roughly 12% of 2021 revenue, including sales to GM’s Shanghai joint venture, followed by Stellantis at 11%, and Volkswagen at 9%. North America and Europe represented approximately 38% and 33% of total 2019 revenue, respectively. 

(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.

Categories
Technology Stocks

Etsy Inc : Major e-commerce marketplace operator sets sights on encouraging repeat purchase behaviour

Business Strategy and Outlook

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s four marketplace properties–Etsy, Reverb, Depop, and Elo7–all target non-commoditized inventories (artisanal crafts, used musical instruments, and vintage clothing resale), generate commissions on third-party, peer to peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price elastic product suite.  

Etsy’s competitive strategy is viewed sound, with the quickly growing firm capitalizing on a surge of COVID-19 induced demand, providing one of only a handful of outlets through which customers could purchase facemasks during the nadir of the pandemic. Though mask sales have dwindled, the platform has remained sticky, with Etsy seeing its active buyer base swell to 96 million (up 18% annually) through 2021 despite lapping a halcyon 2020 in which it netted 36 million customers (75% growth from 2019). Experts claim 171% two-year stacked growth reflects investments made well in advance of the demand surge–from moving its marketplace operations to the cloud (through a partnership with Google), to investing heavily in search engine optimization efforts, and tinkering with performance and brand marketing to boost unaided awareness. 

Moving forward, Etsy is expected to continue to add unique inventory (recently onboarding a number of Indian sellers), to expand its burgeoning international operations (44% of fourth-quarter GMV), to continue to improve search functionality and to expand its suite of seller tools and advertising options, while periodically targeting competitively advantaged tuck-in acquisitions that offer exposure to similarly differentiated end markets. Particularly important will be efforts to increase repeat purchase behavior, with the long-term driver of GMV growth likely be increased average revenue per user in lieu of buyer acquisition after the firm achieves saturation in its six key markets–getting buyers to go to Etsy “not just for the cushions, but for the couch.”

Financial Strength

Etsy’s financial position is viewed sound. While the firm’s gross leverage looks high for an e-commerce company (averaging 5.2 times through 2024, according to analyst forecasts), main concerns are alleviated by a highly cash generative business, with free cash flow to the firm clocking in at 25% of sales in 2022, an operating model that requires minimal maintenance capital expenditure, and access to a $200 million credit facility. Moreover, a net debt position of only $1.3 billion as of the end of 2021 (1.6 turns) suggests only modest underlying leverage. Etsy’s convertible debt structure adds an interesting twist to financial statement analysis. The company has three outstanding series of convertible issuances–$1 billion in 0.25% 2021 notes (due in 2028), $650 million in 0.125% 2020 notes (due in 2026), and $650 million in 0.125% 2019 notes. The structure is common among technology firms, and offers a few key benefits; fewer restrictions, choice of cash or share settlement, cheap capital, and the ability to raise straight debt through subsequent issuance, which strikes us as reasonable (and aligns with practices at technology peers like Twitter and Wayfair). Etsy limits potential dilution with a capped call derivative strategy, with subsequent series that have been utilized to prepay outstanding balances. While the principal value of these notes is accounted for in long-term debt, the equity portion (option value) is accounted for as additional paid-in-capital, with premiums amortized as noncash interest expense over the option’s life. Finally, Etsy is expected to maintain substantial financial flexibility in order to meet its allocation priorities–investments in the business, strategic acquisitions, and share repurchases. Consistent with management commentary, any near-term cash dividend is not anticipated (2026 at the earliest, barring acquisitions), with management preferring the flexibility associated with buybacks.

Bulls Say’s

  • E-commerce trial amidst COVID-19 likely pulled forward e-commerce adoption by two to three years, benefiting digital native platforms like Etsy. 
  • After more than doubling its 2019 buyer base, Etsy has likely reached a demand tipping point, with high teens active buyer penetration across its core six markets heightening barriers to success for new entrants. 
  • The offsite advertisements offer a nice vehicle to increase platform take rates, GMV growth, and seller inventory turnover.

Company Profile 

Etsy operates a top-10 e-commerce marketplace operator in the U.S. and the U.K., with sizable operations in France, Germany, Australia, and Canada. The firm dominates an interesting niche, connecting buyers and sellers through its online market to exchange vintage and craft goods. With $13.5 billion in 2021 consolidated gross merchandise volume, the firm has cemented itself as one of the largest players in a quickly growing space, generating revenue from listing fees, commissions on sold items, advertising services, payment processing, and shipping labels. As of the fourth quarter of 2021, the firm connected more than 96 million buyers and more than 7.5 million sellers on its marketplace properties: Etsy, Reverb (musical equipment), Elo7 (crafts in Brazil), and Depop (clothing resale).

(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.

Categories
Shares Small Cap

Qantas Airways – Omicron impact on 2H22 underlying EBITDA of ~$650m

Investment Thesis:

  • Attractive way to play the Covid reopen trade for investors.  
  • Aiming for all segments to deliver return on invested capital > weighted average cost of capital.
  • Strong position in the domestic market (Qantas Domestic and Jetstar continue to remain the two highest margin earning airlines in the domestic market).
  • Jetstar is well positioned for growth and rising demand in Asia. 
  • Partnership with Woolworths for Loyalty bodes well for membership and earnings.
  • Oil price hedging in FY22 could contribute to performance.
  • Increased competition in the international segment.
  • Relative to peers, strong balance sheet strength; investment grade credit rating.

Key Risks:

  • Disasters that could hurt the QAN brand.
  • Earnings recovery gets pushed out again due to travel restrictions or return of another Covid-19 variant. 
  • Ongoing price led competition forcing QAN to cut prices affecting margins.
  • Leveraged to the price of oil. 
  • Adverse currency movements result in less travel.
  • Labor strikes. 
  • Depressed economic conditions leading to less discretionary income to spend on travel. 

Key Highlights:

  • Omicron impact on 2H22 underlying EBITDA of ~$650m (after mitigations) with operating expenses for 2H22 to include ~$180m of inefficiencies and ramp up costs.
  • Domestic capacity to be 68% of pre-Covid levels in 3Q22, increasing to 90-100% in 4Q22, equating to total FY22 capacity of ~60%.
  • International capacity to be 22% of pre-Covid levels in 3Q22, increasing to 44% in 4Q22, equating to FY22 capacity of 18%.
  • Loyalty on track to deliver more than $1bn gross cash receipts in FY22 and remains committed to its target of $500-600m underlying EBIT by FY24 after returning to double-digit growth by end of CY22.
  • Net capex (excluding land proceeds) in FY22 of $850m and in FY23 of $2.3-2.4bn.
  • Underlying D&A in FY22 of $1.8bn.
  • Net debt within the $4.4-5.5bn target range by end of FY22 and at the bottom half of range from FY23 onwards.
  • The Recovery Plan delivered $840m in savings since the start of the program and remains on track to deliver greater than $900m by the end of FY22.
  • Balance Sheet repair continued with net debt reduction of -9.8% over pcp to $5.5bn (now within target range), refinancing A$300m bond maturing in May 2022.
  • Total liquidity of $4.3bn including $2.7bn cash and committed undrawn facilities of $1.6bn maturing in FY23 and FY24.
  • Investment grade credit rating of Baa2 from Moody’s maintained. 
  • Shareholder distributions remain on hold. 
  • 1H22 fuel cost declined -75% compared to pre-Covid-19 to $0.5bn, primarily due to a -74% reduction in fuel consumption. 

Company Description:

Qantas Airways Ltd (QAN) provides passenger and freight air transportation services in Australia and internationally. QAN also operates a frequent flyer loyalty program. QAN was founded in 1920 and is headquartered in Mascot, 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.

Categories
Commodities Trading Ideas & Charts

ABC reported solid FY21 results and strong balance sheet with focus on cost savings

Investment Thesis

  • Macro conditions remain uncertain in key regions.
  • Strong pipeline of infrastructure projects over the next 2 years is a positive but timing and execution is a risk. 
  • Solid balance sheet position provides some flexibility to the Company to pursue growth. 
  • Leading positions as a lime producer, concrete products producer and cement and clinker supplier.
  • Outlook for lime looks relatively positive with higher infrastructure projects and resource sector activity
  • Cost-out and vertical integration (cement) programs expected to deliver cost benefits that exceed cost headwinds of $10m in FY21.

Key Risks

  • Macro conditions remain uncertain in key regions.
  • Strong pipeline of infrastructure projects over the next 2 years is a positive but timing and execution is a risk. 
  • Solid balance sheet position provides some flexibility to the Company to pursue growth. 
  • Leading positions as a lime producer, concrete products producer and cement and clinker supplier.
  • Outlook for lime looks relatively positive with higher infrastructure projects and resource sector activity
  • Cost-out and vertical integration (cement) programs expected to deliver cost benefits that exceed cost headwinds of $10m in FY21.

FY21 results summary: Compared to pcp: 

  • Revenue increased +8% to $1,569.2m with increased sales volumes experienced for all products other than lime (as a result of lower Alcoa volumes) and strong cement pricing, partially offset by lower average prices for lime amid pricing resets across key alumina contracts. 
  • EBITDA margin declined -120bps to 17.5% and included Covid-19 impacts and interrupted production, much of which are expected to be non-recurring (non-recurring impacts were $16.2m with management expecting $10.3m of these to be non-recurring, with higher demurrage and pallet costs expected to continue in the short term). 
  • Net finance cost declined -6%, as a result of lower average borrowings which saw interest cover improve +1.1x to 14.4x. 
  • Operating cash flow declined -23.8% to $195.2m, in line with expectations, as pcp benefited from tax refunds. 
  • Capex increased +3% to $140.5m million ($106m million stay-in-business capex + $34.5m for development). 
  • Joint Ventures earnings contribution increased +23.8% to $33.3m, with Sunstate’s contribution improving by +115% driven by strong demand across the southeast Queensland construction sector, ICL increasing earnings contribution by +13% and Mawsons increasing earnings contributions by +23%. 

Capital management

  • Strong balance sheet with liquidity of $453.7m (down -13.6% over pcp) and net debt of $437.4m (up +17.5% over pcp), representing a leverage ratio of 1.6x underlying EBITDA (vs 1.4x in pcp) and gearing of 34.5% (up +400bps over pcp), both well within banking covenants and Board’s capital management target range. 
  •  Return on Funds Employed (ROFE) declined -30bps over pcp to 10.6%, however, remained above cost of capital (normalising for Covid-19 and operational non-recurring costs of $16.2m, ROFE increased to 11.6%), with management expecting long-term ROFE improvement coming from Kwinana Upgrade project cost savings, development of downstream land investments and ongoing cost-out. 
  • The Board declared fully franked final ordinary dividend of 7cps (down -3.45% over pcp), bringing full year total to 12.5cps, up +4.2% over pcp and representing a payout ratio of 68.5% of underlying earnings, within the Board’s target range of 65-75%. 

Cost savings above target

Management remains focused on their cost reduction program, delivering gross savings of $26.1m through operational efficiencies, procurement, and a more simplified organisational structure, equating to net cost out of $13.6m, +36% higher than expected.

Company Profile

Adbri Ltd (ABC) is an Australia listed construction materials and liming producing company. ABC is Australia’s leading (1) lime producer in the minerals processing industry; (2) concrete products producer; and (3) cement and clinker importer. ABC is Australia’s number two cement and clinker supplier to the Australian construction industry and number four concrete and aggregates producer.

(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.

Categories
LICs LICs

PTM reported revenue of $128.7m with attractive dividend yield

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Investment Thesis

  • Trades on an attractive dividend yield.
  • PTM is in a position to attract net inflows as value oriented strategies may make a sustained comeback. 
  • Recent decision to reduce fees from 1.35% to 1.54%, represents ~9% decline in revenue. In our view, we expect further pressure on the funds management industry and fees (as a result of industry and super funds building inhouse capabilities and passive investing with significantly lower fees/asset allocators becoming more of the norm). 
  • Significant key man risk. Particularly poignant as Kerr Neilson has stepped down from CEO, and whilst he has not signaled plans to leave altogether, it remains a possibility.
  • New distribution channels present growth runways for PTM’s core funds.
  • Transition risk as the new CEO takes over. 

Key Risks

  • Trades on an attractive dividend yield.
  • PTM is in a position to attract net inflows as value oriented strategies may make a sustained comeback. 
  • Recent decision to reduce fees from 1.35% to 1.54%, represents ~9% decline in revenue. In our view, we expect further pressure on the funds management industry and fees (as a result of industry and super funds building inhouse capabilities and passive investing with significantly lower fees/asset allocators becoming more of the norm). 
  • Significant key man risk. Particularly poignant as Kerr Neilson has stepped down from CEO, and whilst he has not signaled plans to leave altogether, it remains a possibility.
  • New distribution channels present growth runways for PTM’s core funds.
  • Transition risk as the new CEO takes over. 

1H22 result highlights

  • Fee revenue increased +2% over pcp to $133.6m, with Management fee revenues increasing +3% over pcp due to the increase in average FUM and changes in product mix (average fee up amid higher portion of retail FUM) partially offset by -32% over pcp decline in Performance fee revenues to $2.5m. Other income declined from a $35.7m gain in pcp to a $4.9m loss due to unrealized losses on seed investments. 
  • Expenses increased +15.8% to $43.2m, primarily driven by +39.6% YoY increase in share-based payments expense as share-based payments expenses normalized after being relatively low in pcp due to rights forfeited during that period, and +42.3% increase in business developments costs mainly due to advertising and the launch of the Platinum Investment Bond. 
  • NPAT declined -33.6% over pcp to $60m, primarily driven by unrealized losses on seed investments, including share of associates losses, which contributed losses before tax of $7.4m compared to income before tax of $35m in pcp. Excluding gains and losses on seed investments (net of tax), underlying NPAT declined -1.2% over pcp to $65.1m. 
  • FUM declined -6.4% over 2H21 to $22bn (down -7% over pcp), driven by net outflow of $900m and negative investment returns of $500m primarily from the Asia ex-Japan investment strategy ($400m). 
  • The Board declared a fully franked interim dividend of 10cps, down -16.7% over pcp and equating to annualized yield of ~7.4% (using 31 December 2021 share price of $2.70).

Company Profile

Platinum Asset Management (PTM) is an ASX-listed, Australian based fund manager which specializes in investing in international equities. PTM currently manages ~A$23.6bn. 

 (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.

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Daily Report Financial Markets

European Market Outlook – 17 March 2022

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Daily Report Financial Markets

Japan Market Outlook – 17 March 2022

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Daily Report Financial Markets

USA Market Outlook -17 March 2022

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Daily Report Financial Markets

Indian Market Outlook – 17 March 2022

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Daily Report Financial Markets

Shanghai Market Outlook – 17 March 2022

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