Investment Thesis
- As the Covid pandemic subsides, near-term earnings may underwhelm but longer term, we don’t doubt the quality of SHL’s assets, which is geographically diversified, and high quality management team.
- Ageing population requires more diagnostic tests, especially as Medicine focuses on preventative medicine.
- Market leading positions in pathology (number one in Australia, Germany, Switzerland, and UK number three in the US). Second leading player in Imaging in Australia.
- High barriers to entry in establishing global channels.
- Ongoing bolt-on acquisitions to supplement organic growth and potentially improve margin from cost synergies.
- Leveraged to a falling dollar.
- Globally diversified.
Key Risks
- Disruptive technology leading to reduced diagnostics costs.
- Competitive threats leading market share loss.
- Deregulation resulting in new pathology collection centres.
- Adverse regulatory changes (fee cuts).
- Disappointing growth.
- Adverse currency movements (AUD, EUR, USD).
Bulls Say’s
- Revenue of $4,757m, up +7%.
- EBITDA of $1,540m, up +18%.
- Net Profit of $828m, up +22%.
- Cash generated from operations of $1,041m, up +28%, reflecting EBITDA growth and lower interest payments. SHL achieved 85% conversion of EBITDA to gross operating cash flow.
- Earnings per share of 170.8cps, up +21%.
- SHL retained a strong balance sheet position, with gearing at record low level of 12.9% (vs 12.5% in the pcp) and below covenant at <55%, interest cover of 44.9x (vs 33.8x in the pcp and above covenant limit of >3.25x) and debt cover of 0.3x (vs 0.4x in the pcp and covenant limit of <3.5x), and with ~$1.4bn of available liquidity.
- SHL maintained its progressive dividend policy, with the Board declaring an increase of 4 cents (or up +11%) to 40 cents (100% franked) for the FY2022 Interim Dividend.
Company Profile
Sonic Healthcare (SHL) is a medical diagnostics company with operations in Australia, New Zealand, and Europe. The company provides a comprehensive range of pathology and diagnostic imaging services to medical practitioners, hospitals and their patients along with providing administrative services and facilities to medical practitioners. SHL has three main segments: (1) Pathology/clinical laboratory services based in Australia, NZ, UK, US, Germany, Switzerland, Belgium and Ireland. (2) Diagnostic imaging services in Australia; and (3) Other which includes medical centre operations (IPN), occupational health services (Sonic HealthPlus) and laboratory automation development (GLP Systems).
(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:
- Leveraged to the structural growth story of electronics payments and e-commerce globally.
- Strong market position (largest payments platforms in North America) and increasing global market share.
- Sophisticated technology platforms which have been incrementally improved via R&D and acquisitions. PYPL’s technology stack are difficult to replicate and impose high barriers to entry to new competitors.
- Value-accretive acquisitions.
- Incoming strategic partnerships to further unlock payment efficiency and access to wider markets (e.g. Instagram, Uber, Paymentus).
- Strong free cash flow generation gives way to capital management initiatives.
Key Risks:
- Global macro-economic conditions deteriorate, impacting consumer spending and business activity.
- Pricing pressures from emerging competitors and alternatives to PayPal. Leading banks or tech giants such as Amazon may develop their own payment platforms to cannibalize sales from Paypal (e.g. Apple Pay).
- U.S.-China geopolitical tensions impeding cross-border e-commerce transactions.
- Adverse currency movements and regulatory changes (data privacy / protection, governments’ intervention/protection policies).
- Security and technology risks (including cyber-attacks).
- Value destructive acquisition(s).
Key highlights:
PYPL FY21 revenue of $25.37bn was largely in line with consensus forecast of $25.35bn, however, GAAP EPS of $3.52 missed forecast of $3.60. The Company added 49 million NAAs (net active accounts) bringing total active accounts to 426 million, up +13%, leading to TPV growing +33% to $1.25 trillion with management forecasting TPV to reach $1.5 trillion in FY22. Management announced a pivot in strategy to shift emphasis more towards engagement and driving higher value NNAs, leading to scrapping of the 750 million accounts target by 2025. However, management remains confident of new strategy driving higher ROI
- Pivot in strategy – Management has pivoted their strategy and is shifting emphasis more towards engagement and driving higher value NNAs (consumers who are more engaged, drive incremental sales for merchants which drive growth at much higher margins and ROI) rather than just focusing on generating account creation (over time the Company still expect to grow net new actives, but more in line with pre-pandemic levels), leading to management scraping their target of growing active accounts to 750 million by 2025.
- eBay headwinds in the rearview – last revenue pressure in 2Q22. eBay’s migration of payments away from PYPL led to 1100bps headwind on top-line in FY21, however, the Company remains at final stage of transition with no pressure past 2Q22 and a final ~400bps revenue headwind in FY22 (concentrated in 1H22).
- Capital management. Given strong cash flow generation (cashflow from operations up +8% over pcp to $6.3bn and FCF up +9% over pcp to $5.4bn) and strong balance sheet with ample liquidity of $16.3bn in cash, equivalents and investments, management continued shareholder return initiatives, returning $3.4bn in the year via repurchase of ~15.4m shares of common stock.
- Growing proportion of private label sales. Own brand sales percentage increased across all segments, with Bapcor Trade delivering 29.6% (up +50bps over 2H21), Retail delivering 33.9% (up +120bps over 2H21), Speciality Wholesale delivering 54.6% (up +130bps over 2H21) and New Zealand delivering 30.3% (up +40bps over 2H21), with the Company remaining on track to reach its 5-year targets to supplement market leading brands with BAP’s own brand products, which should be a positive for margins.
- Revenue growth of ~15-17% Revenue growth of ~15-17% on a spot and FXN basis (excluding eBay to grow ~19-21%) vs prior guidance of high-teens, as spending remains impacted by omicron, inflationary pressures, and lack of stimulus.
Company Description:
PayPal Holdings Inc (NASDAQ: PYPL) is an American company in the global payments industry that acts as a payment gateway between merchants and customers, enabling electronic forms of payment instead of cash and cheques. The Company also provides an online payment system that allows individual persons to send and receive money between PayPal accounts. As of 2021, PayPal has 426 million active users and facilitates transactions across more than 200 countries and 25 currencies.
(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:
- Attractive valuation versus Analysts price target.
- Leveraged to the improving economic conditions and activity in the U.S.
- Efficiency gains at the expense line exceeds market expectations.
- Significant leverage to the yield curve steepening in the U.S.
- Cost out program to support earnings over the long-term.
- Revenue growth driven by consumer and business.
- Credit quality is very strong, with further reserve releases possible.
- Capital position is well above requirement level and management’s desired buffer, which opens up capital management initiatives.
Key Risks:
- Further decline in net interest margins from low yields and U.S. Fed interest rate cuts.
- Intense competition to loan growth.
- Subdued economic growth.
- Funding pressures for deposits and wholesale funding.
- Political and regulatory changes affecting the banking legislation.
- Credit risk with potential default of mortgages, personal and business loans and credit cards.
- Efficiency gains disappoint relative to market expectations.
Key highlights:
BAC’s FY21 results beat consensus on both top and bottom line, as revenue growth outpaced expense growth YoY to deliver positive operating leverage, which combined with the benefit from share repurchases delivered EPS of $3.57 (vs estimate of $3.44), equating to ROE of 12.2% (up +544bps over pcp) and ROTCE of 17% (up +752bps over pcp). Asset quality continued to improve, and shareholder returns remained strong. Maintain Buy – improvement in NII (loan growth + interest rate hikes) combined with management’s outlook of flat costs growth should drive operating leverage, with long term margin expansion coming from investment in technology leading to competitive and cost advantages.
- FY22 outlook – robust YoY growth expected in NII. Robust YoY NII growth (1Q to be up about “a couple of hundred million” QoQ and grow each subsequent quarter) driven by high-single-digit YoY loan growth and aided by interest rate increases (+100bps parallel shift in the interest rate yield curve is estimated to benefit net interest income by $6.5bn), particularly if short-term rates rise more and sooner than expected given higher balance sheet sensitivity to short end interest-rate (~2x compared to 3Q15, middle of last rate cycle). Flat expenses compared to pcp. Effective tax rate of 10-12%.
- Strong asset quality with loss rate at historical lows. Asset quality improved significantly with net charge-offs continuously declining through FY21 to historic low of $362m (down -59% over pcp) resulting in a historically low net charge-off ratio of 15bps (down -23bps over pcp), which combined with improving macroeconomic conditions, led to provision for credit loss benefit of $489m (down by $542m over pcp), reflecting a net reserve release of $851m.
- Changes to NSF fees and overdraft fees – $750m headwind in FY22. Management announced elimination of NSF (non-sufficient funds) fees and -71.4% YoY reduction in overdraft charge per occurrence to $10 in FY22, which is expected to see -75% YoY decline in fees to ~$250m in FY22.
- Strong shareholder returns with $7.5bn in share repurchases equating to $25.1bn for the year and $1.7bn in dividends equating to $6.6bn for the year.
Company Description:
Bank of America (BAC) is one of the largest banks in the U.S., serving consumers, small and middle-market businesses, and large corporations with a full range of banking, investing, asset management, and other financial and risk management products and services.
(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.
