Investment Thesis
- Trades in-line with our blended valuation (DCF / PE-multiple). IVC is currently trading on a 12-mth blended forward PE-multiple of 30.0x and 2.4% dividend yield.
- IVC continues to be impacted by Covid-19 and associated lockdown/containment measures.
- Potential for increased death rates.
- Continued cost control from strategic review and operational efficiency.
- IVC benefits from demographics and long-term population growth.
- IVC holds leading market positions in its core markets.
- IVC has strong cash flow conversion and generation.
- High barrier to entry with quality assets and a business model that is difficult to replicate.
- Increased competition from budget operators in Australia.
Key Risks
- Continued reduction in death rate compared to expectations/forecasted trend.
- Increased competition especially around pricing.
- Protect and Grow 2020 does not yield incremental returns as anticipated.
- Underperformance of funds under management.
FY21 Results Highlights
- Statutory Revenue of $532.5m, up +11%.
- Operating Revenue up +11% to $527.1m.
- Operating EBITDA up +22% to $125.5m, with a return to positive operating leverage.
- Operating EBIT up +36% to $77.8m.
- Reported Profit After Tax of $80.2m, was higher than the loss of $11.5m in the pcp.
- IVC achieved strong cashflow conversion of 105%, ROCE of 11.2% and leverage ratio of 1.2x.
- Operating EPS of 31.6 cents, up 51% on pcp.
- The Board declared a final fully franked dividend of 11.5cps which takes Full Year dividends to 21.0cps (equating to 66% dividend payout ratio).
- IVC maintained a strong balance sheet with net debt at $144m at year-end, representing a leverage of 1.2x, a slight improvement on the pcp.
Company Profile
InvoCare Ltd (IVC) is the largest private funeral, cemetery and cremation operator in the Asia Pacific Region. It has leading market positions in countries like Australia, New Zealand, and Singapore.
(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
Box has sought to differentiate its offerings using a two-step strategy. First, the company has pivoted away from cloud storage, an area where price competition can be fierce, especially for smaller players such as Box. Instead, the firm has focused on redesigning its platform as a collaboration ecosystem. With features such as Box Sign, Relay, and Governance, the firm is creating an open garden where users can interact with native Box features, along with more than 1,500 integrations from various software vendors, to manage their daily workflows.
First, some other key competitors in the enterprise collaboration space include the likes of Microsoft and Google. These players have access to significantly more capital than Box, creating a tough competitive environment. Second, the legacy solutions that businesses often use for collaboration or document sharing are well entrenched, leading to high switching costs for businesses adopting Box’s solution.
Financial Strength
Box’s financial health to be in good shape. Although the company remains unprofitable in GAAP terms, we are encouraged by the firm’s positive free cash flow, or FCF, which we expect to trend upward as the firm is able to trim operating costs while maintaining solid top-line growth. The firm’s balance sheet is also in good shape, with cash and equivalents well above $500 million at the end of fiscal 2022. While Box has long-term debt, we do not foresee the firm encountering any difficulties in paying its obligations via its strong cash reserves and forecast FCF generation. With a strong net cash balance and cash flow generation profile, it is expected that management to pursue further M&A coupled with continued share repurchases. Management has been active on both of these fronts recently with tuck-in acquisitions of SignRequest and Cloud FastPath and significant share repurchase programs.
Fourth-quarter revenue of $233 million, buoyed by product stickiness and larger deal wins, was up 17% year over year. Much like other software-as-a-service companies, Box can grow its revenue in two ways: increasing average revenue per user, or ARPU, and/or increasing its number of paid users. Box has increased its ARPU by upselling its product to existing clients and increasing large deal sizes, with $100,000-plus deals growing 25% year over year. Management provided revenue guidance between $233 million and $235 million for the first quarter in fiscal year 2023, with adjusted EPS between negative $0.05 and negative $0.04. Full-year guidance was $990 million to $996 million for revenue with adjusted EPS landing between negative $0.07 and negative $0.03.
Bulls Say’s
- Box’s revenue is buoyed by secular tailwinds as enterprise workflow collaboration tools remain in hot demand.
- With the firm’s focus on the enterprise space, clients are typically sticky, leading to more certainty around revenue.
- Box’s large install base and go-to-market motion will allow the firm to drive top-line growth while also enacting operating efficiencies leading to better free cash flow generation.
Company Profile
Box is a cloud-based content services platform that provides cloud-based storage and workflow collaboration services for enterprise customers. The firm was founded in 2005 as a file sync and sharing provider. More recently, however, the company has focused on bolstering its product portfolio by adding tools such as governance and e-signature that enhance workflow management and collaboration.
(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
- Energy margins bottom out and could potentially start to improve (higher customer and volume numbers).
- Strong cash flow business which provided flexibility to deploy cash in growth opportunities and capital management.
- On-going focus on costs and digitalization should support margins.
- Potential capital management initiatives (e.g., buyback).
- Demerger into AGL Australia and Accel may unlock shareholder value.
- Potential favourable changes to the regulatory environment.
- Potential M&A – AGL has already received a takeover bid at $7.50 per share which was rejected by the AGL Board.
Key Risk
- Competitive pressures leading to margin erosion.
- Cost pressure and fuel supply issues leads to margin erosion.
- Increase in supply leading depressed prices.
- Regulatory risk (policy uncertainty), such recent regulation in electricity markets [ Victorian Default Offer (VDO) and Default Market Offer (DMO)]
- Un-scheduled shutdowns impacting earnings.
1H22 headline results
- 1H22 group underlying profit after tax of $194m, was down -41% on pcp or down -23% excluding the non-recurrence of the Loy Yang outage insurance proceeds. In term of AGL Australia, the key drivers of performance were consumer energy margin was down predominantly due to the impact of milder weather on demand, higher cost of energy with increased residential solar volumes, and margin compression from customers switching to lower priced products. Further, supply and trading gas margin was lower as expected, impacted by lower priced legacy supply contracts rolling off, during the 2H21. With respect to Accel Energy, trading and origination electricity margin were lower due to lower contracted electricity prices and lower offtake sales to consumer electricity resulting from increased penetration of solar. Providing some positive offsets to underlying profit was positive movement in centrally managed expenses driven by cost-out initiatives, favourable movement in depreciation due to the asset impairments recognized in FY21 and lower tax expense (reflecting the fall in profit).
- Underlying cash flow from operations was up +8% YoY, driven by a large inflow from margin calls versus an outflow pcp and positive working capital movements, which was able to more than offset the decline in underlying EBITDA
- FY Q21 Results
- 1H22 headline result. C
Company Profile
AGL Energy Limited (AGL) is one of Australia’s leading integrated energy companies and the largest ASX listed owner, operator and developer of renewable energy generation in Australia. The company sells and distributes gas and electricity. Further, it also retails and wholesales energy and fuel products to customers throughout Australia. The business operates four main segments: Energy Markets, Group Operations, New Energy and Investments.
(Source: Banyantree)
- Relative to the pcp: (1)
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
- Principal Investments could grow to become a meaningful contributor to group performance over the medium-to-long term.
- MFG no longer trades at a significant premium to its peer-group post the recent de-rating.
- Acquisitions could pave growth runways, helping to ease the Company’s fund capacity constraints.
- Average base management fee (bps) per annum (excluding performance fee) continues to be stable but there are risks to the downside from pressures on fees (which is an industry trend not specific to MFG alone).
- Continued strong investment performances, especially in the global and infrastructure funds.
- Growing levels of funds under management.
- New strategies could significantly increase the addressable market and help sustain earnings growth.
Key Risk
- Decline in fund performance.
- Risk of potential funds outflow – both retail and institutional (loss of a large mandate).
- Execution risk with the acquisitions.
- Significant key man risk around Hamish Douglass and key management or investment management personnel.
- New strategies fail to add meaningful earnings to the group.
1H22 results summary :Compared to pcp:
- Adjusted revenue increased +15% to $384.1m, driven by a +13% increase in total management and service fee revenue amid +12% increase in average FUM to $112.7bn and +116% increase in other revenue (includes distribution income of $8.6m, realised capital gains of $8.1m and net FX gain of $2.1m), partially offset by -8% decline in performance fees.
- Adjusted expenses increased +24% to $65.3m with Funds Management business’s cost to income ratio (excluding performance fees) increasing +60bps to 17.4% (excluding earnings contribution from SJP, increased +280bps to 19.6%) and management anticipating Funds Management segment expenses for FY22 to be $125-130m.
- Adjusted NPAT of $248.1m increased +16%, and excluding the earnings contribution for the period from the St James’s Place mandate, adjusted NPAT was $212.5m, broadly in line with pcp.
- Strong balance sheet with no debt and total investment assets of $1,016.7m (up +13%) including cash position of $291.5m.
Capital management
- Declared a 75% franked interim dividend of 110.1cps, up +13% over pcp and confirmed the dividend policy of 90-95% payout of the profit after tax of the Funds Management business.
- Announced intention to progress with a 1-for-8 bonus issue of options to shareholders and issuance of 10 million unlisted options to staff, both at exercise price of $35 per option and 5-year term (exercisable at any time until expiry).
- Taking into consideration the implementation of an on-market share buy-back (subject to various factors including market conditions).
Company Profile
Magellan Financial Group Ltd (MFG) is a specialist funds management business. MFG’s core subsidiary, Magellan Asset Management Ltd, manages ~$53.6bn of funds under management across its global equities and global listed infrastructure strategies for retail, high net worth and institutional investors.
(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
Jazz Pharmaceuticals added its leading drug, Xyrem, to its portfolio in 2005 with the acquisition of Orphan Medical for about $123 million. This was a great price for the then newly approved drug, which became a blockbuster. At that point, Xyrem was the only approved treatment for cataplexy (sudden muscle weakness or paralysis) in narcolepsy; it has since garnered additional approvals for excessive daytime sleepiness in patients with narcolepsy. Jazz reached a settlement in 2017 with Hikma Pharmaceuticals to not allow generics on the market until January 2023. Jazz will retain some economic profit from royalties on generic sales and a shared distribution program.
Management has been focused on diversifying its portfolio, with the new drug approvals of Zepzelca (for metastatic small-cell lung cancer), Rylaze (for acute lymphoblastic leukemia), and Xywav (for the treatment of cataplexy, EDS, and idiopathic hypersomnia). Strong launches and commercialization efforts for these drugs will be crucial for Jazz to diversify its portfolio. Acquiring recently launched drugs has been part of Jazz’s portfolio diversification strategy. In May 2021, Jazz acquired GW Pharmaceuticals for the hefty price of $7.2 billion. GW contributed $677 million to Jazz’s overall 2021 revenue, largely driven by its leading product, Epidiolex. This drug is a cannabidiol for the treatment of severe, rare forms of epilepsy.
Financial Strength
Jazz is in a decent financial position thanks to historically strong cash flow generation from Xyrem’s sales of $7.2 billion. GW’s leading drug, Epidiolex, could be a potential blockbuster grossing over $1 billion annually by 2023. Company has already received FDA approval and is also marketed in Europe. This acquisition allows Jazz to reach patient populations with rare and severe forms of epilepsy with approved indications for Epidiolex as young as one year of age.
The GW acquisition will be dilutive to both GAAP and non-GAAP adjusted net income in the near term, and it will damp adjusted ROICs. Historically, management has pursued both larger deals ($1 billion or more) and smaller, early-stage deals for growth while spending a low-double-digit percentage of sales on R&D. Once the acquisition of GW is fully integrated and management has deleveraged, the company will continue making acquisitions to help expand and diversify its portfolio.
Bulls Say
- The GW acquisition allows Jazz to reach patient populations with rare and severe forms of epilepsy with approved indications for Epidiolex as young as one year of age.
- Jazz’s extensive network of sleep doctors should give the company a competitive edge when marketing its new sleep therapies.
- Xyrem’s historically strong cash generation has allowed the company to make recent acquisitions to help diversify its portfolio.
Company Profile
Jazz Pharmaceuticals is an Ireland-domiciled biopharmaceutical firm focused primarily on treatments for sleeping disorders and oncology. Jazz has nine approved drugs across neuroscience and oncology indications; its portfolio includes Xyrem and Xywav for narcolepsy, Zepzelca for the treatment of metastatic small-cell lung cancer, Rylaze for acute lymphoblastic leukemia, and Vyxeos for acute myeloid leukemia. In May 2021, Jazz acquired GW Pharmaceuticals and gained its leading product, Epidiolex for the treatment of severe, rare forms of epilepsy.
(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
Veeva is the leading provider of cloud-based software solutions tailored to the life sciences industry, providing an ecosystem of products to address the operating challenges and regulatory requirements that these companies face. Its highly specialized offerings for the life science industry allow companies to improve operational efficiency to get products to market faster while ensuring regulatory compliance and ultimately sell more effectively. Its effective technology and dominant position enable Veeva to generate excess returns commensurate with a wide-moat company. Its strong retention, continued development of new applications, increasing penetration with existing customers, addition of new customers, and expansion into industries outside of life sciences should allow the company to extend its market leadership, in Analysts view.
The company operates in two categories. Commercial solutions entail vertically integrated customer relationship management services and end-market data and analytics solutions. R&D solutions is a horizontally integrated content and data manager. Veeva’s CRM application supports real-time collaboration and regulatory oversight and enables incremental add-on solutions. The incremental functionality is critical to improving marketing programs while remaining in compliance with mandated antikickback laws and statutes. This service has been well received by the life sciences industry and has propelled Veeva to become the leading solution with the lion’s share (approximately 80%) of this niche market. As a follow-on to the initial introduction of CRM, management introduced R&D solutions to broaden the portfolio that addresses the largely unmet needs of the life sciences industry outside of CRM. Each module offers features and functionality targeting four key areas in life sciences: clinical (trial management), regulatory (compliance), quality of manufacturing, and safety.
Financial Strength
It is held Veeva enjoys a position of financial strength arising from its strong balance sheet (no debt) and leading position in a growing market. As of fiscal 2022, Veeva had over $2.4 billion in cash and short-term investments and no debt. It is likely the company will continue to use the cash it generates from operations to fund future growth opportunities. From Analysts perspective, management has been disciplined about M&A and taking on debt. The 2019 acquisition of Crossix was the firm’s largest to date, at approximately $430 million. It is anticipated the company will continue make small tuck-in acquisitions and fund them through available cash and cash flow from operations. Even in this scenario, increasing liquidity is foreseen, as the firm’s reserve of cash should continue to increase.
Bulls Say’s
- Veeva’s best-of-breed vertical addressing unmet needs provides opportunities to further penetrate a highly fragmented market.
- The rapid adoption of the company’s new modules continues to entrench Veeva in mission-critical operations of customers, making it increasingly challenging for competitors to gain a foothold.
- Veeva’s institutional knowledge and codevelopment partnerships with customers enable the company to develop robust offerings addressing market needs.
Company Profile
Veeva is a leading supplier of software solutions for the life sciences industry. The company’s best-of-breed offering addresses operating and regulatory requirements for customers ranging from small, emerging biotechnology companies to departments of global pharmaceutical manufacturers. The company leverages its domain expertise and cloud-based platform to improve the efficiency and compliance of the underserved life sciences industry, displacing large, highly customized and dated enterprise resource planning systems that have limited flexibility. As the vertical leader, Veeva innovates, increases wallet share at existing customers, and expands into other industries with similar regulations, protocols, and procedures, such as consumer goods, chemicals, and cosmetics.
(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
Splunk is a leader in ingesting, indexing, and analyzing machine generated data, and it alleged the company will maintain its leadership status for the foreseeable future. It is held machine data to become more pervasive, impacting every part of an enterprise’s operations. With more data to ingest, index, and analyze, it is foreseeen narrow-moat Splunk has a long runway for growth as it seeks to continue to dominate the enterprise market. Splunk’s offerings primarily target two broad use cases: security and full-stack monitoring & analysis (FSMA). On the security front, Splunk’s SIEM, or security information and event management, operates as a well-refined alert system, putting out alerts if any nefarious activity appears on a client’s network. Splunk’s security orchestration, automation, and response, or SOAR, software is geared toward triaging these issues automatically. SIEM and SOAR software, working in tandem, allow an enterprise’s IT team a reprieve by using artificial intelligence to triage security issues, thereby leading to a substantially lower number of alerts that need to be manually dealt with.
The FSMA space is nascent, springing into existence as a method of unifying and coalescing disparate parts of an enterprise’s monitoring framework. Splunk’s FSMA offering seeks to give enterprises a one-stop shop to monitor their entire IT stack, ranging from application performance to logs to end user experience. Splunk’s offering allows enterprise customers to remove these data silos and monitor the entire IT stack from one consolidated platform.
It is held Splunk warrants a narrow economic moat thanks to high customer switching costs. It is foreseen more than 90% of Fortune 100 firms using Splunk’s offerings as a vote of confidence in its enterprise product lineup. Further, it is impressing, Splunk’s strong cloud dollar-based net retention (DBNR) that has consistently remained above 120%. With the ability to land big customers and consistently upsell them, analysts remain confident in Splunk’s long-term growth prospects.
Financial Strength
It is anticipated Splunk’s financial position is healthy. Splunk ended fiscal 2022 with $1.43 billion in cash and current investments. This is juxtaposed with the company’s convertible senior notes of $3.14 billion at the end of fiscal 2022. While debt exceeds cash-in-hand currently, it is likely Splunk’s cash and cash generation over the next five years will far outstrip its commitments over the same time period. As the company undergoes the cloud transition, its effect on free cash flow has been evident. The company’s FCFE (free cash flow to equity) margins from 2014 to 2019 were comfortably in the double-digits. However, with the cloud transition dampening revenue and increasing operating spend, free cash flow margins have been significantly lower than before. However, it is alleged these transitory costs to allay and project that Splunk will achieve consistent double-digit FCFE margins starting fiscal 2025. It isn’t likely for any major shifts in Splunk’s capital structure. It is foreseen the company raising capital in the future by issuing more equity or taking advantage of low interest rates and issuing debt.
Bulls Say’s
- Splunk has secular tailwinds behind its back as the security and FSMA markets are expected to grow rapidly.
- Splunk’s products are incredibly sticky, offering the company an opportunity to increase cross-selling velocity as customers increase their usage of Splunk’s platform.
- Many of Splunk’s enterprise customers are undergoing digital transformations. This shift should bode well for Splunk as these efforts typically include leveraging technology such as Splunk’s for efficiency gains.
Company Profile
Splunk is a cloud-first software company that focuses on analyzing machine data. The company is a major player in two markets: security and full-stack monitoring & analysis. Splunk is currently undergoing a cloud transition as the company weans its on-premises customers over to its cloud products that are delivered as software-as-a-service. The firm’s top line consists of the sale of software licenses, cloud subscriptions, and maintenance and support.
(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.
