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Commodities Trading Ideas & Charts

NRG Narrows Winter Storm Uri Loss, Moves Forward With Capital Allocation Plan

Business Strategy and Outlook

NRG Energy has completed its latest strategic shift following the $3.625 billion acquisition of Direct Energy in January 2021, the sale of most of its Northeast power generation fleet, and the planned closure of four Midwest power plants. A higher share of retail energy earnings helps offset the long-term threat to NRG’s legacy fossil fuel generation fleet as renewable energy grows. NRG will benefit the most if electricity demand grows in its key markets, particularly Texas and the Northeast. In Texas, brief summer heat spells in 2018 and 2019 along with Winter Storm Uri in February 2021 show that growing demand can also create more energy price volatility and risk. Uri resulted in $1 billion of gross losses for NRG in just two weeks. 

Despite offsetting much of those one-time losses, it’s uncertain how energy market reforms in Texas will impact NRG in the long run. NRG’s transformation has taken twists and turns during the last five years, ultimately shrinking its wholesale generation business and increasing its retail energy business. Between 2016 and 2020, NRG divested half of its generation fleet, brought in nearly $3 billion of cash, and eliminated $10 billion of debt. In spring 2017, NRG sent subsidiary GenOn Energy into bankruptcy and in 2018, NRG sold its renewable energy business, its 47% stake in NRG Yield, and its South Central generation.

Financial Strength

NRG’s transformation, which started in mid-2017, simplified its balance sheet and improved its credit metrics. Before the Direct Energy acquisition, NRG had cut its recourse debt below $6 billion and was on track to reach investment-grade credit metrics by the end of 2020. The all-cash Direct Energy acquisition and losses from the Texas winter storm in February 2021 push that back slightly. Management is targeting 2.5-2.75 times net debt/EBITDA, a level it reached in 2019 but might not reach again until 2023 or later. The winter storm losses led management to scale back its 2021 debt reduction target to less than $300 million from the pre-storm $1.05 billion target. The board’s decision to initiate a $1 billion stock repurchase plan in late 2021 suggests NRG’s capital allocation focus has shifted away from balance sheet repair. Lower capital expenditures should boost cash flow as NRG adjusts to maintenance levels at its core business. The retail business requires little capital investment.  

The $3 billion of cash proceeds from the renewable energy, NRG Yield, and South Central business sales helped NRG finance the Direct Energy acquisition with no new equity. Management reset the dividend at $1.20 per share annualized in 2020, up from $0.12 in 2019. NRG plans to pay a $1.40 per share annualized dividend in 2022. Robust free cash flow and share buybacks should allow management to meet its 7%-9% dividend growth target easily. Before the 2017-18 restructuring, NRG carried $19.5 billion of consolidated debt at year-end 2015, but only $7.9 billion was recourse parent debt. The rest was nonrecourse debt at GenOn Energy, NRG Yield, or project financing. The GenOn bankruptcy eliminated $2.7 billion of debt, and the 2018 divestitures eliminated another $7 billion of debt. NRG used $2 billion of cash proceeds from its 2018 asset sales to pay down parent debt and repurchase $1.25 billion of stock. NRG bought back $1.6 billion of stock in 2019-20 before the Direct Energy acquisition.

Bulls Say’s

  • NRG’s transformation in 2017-20 cut the business in half, improved its credit metrics, and generated substantial cash to use for the dividend, stock buybacks, and acquisitions like Direct Energy. 
  • NRG’s match between its wholesale generation earnings and its retail supply earnings provides a hedge that stabilizes consolidated earnings. 
  • NRG’s primary operations are in Texas, which we think will have among the fastest electricity demand growth of any state during the next decade.

Company Profile 

NRG Energy is one of the largest retail energy providers in the U.S., with 7 million customers, including its 2021 acquisition of Direct Energy. It also is one of the largest U.S. independent power producers, with 16 gigawatts of nuclear, coal, gas, and oil power generation capacity primarily in Texas. Since 2018, NRG has divested its 47% stake in NRG Yield, among other renewable energy and conventional generation investments. NRG exited Chapter 11 bankruptcy as a stand-alone entity in December 2003.

(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
Commodities Trading Ideas & Charts

S32 reported strong 1H22 results driven by higher commodities prices and strong production results

Investment Thesis

  • Prices of S32’s key commodities expected to moderate or be relatively flat relative to FY21 realized prices.
  • Management highlighted “FY22 guidance is unchanged with the exception of non-operated Brazil Alumina and our underground base metals operation Cannington. Separately volumes at Mozal Aluminium and Cerro Matoso are expected to lift from FY21 following our investment in high returning improvement projects that will increase production into currently favourable markets for aluminium and nickel”. 
  • Analysts estimate the Company will produce significant free cash flow over the next three years; adequate to support growth and capital management.
  • Significant cash on the balance provides flexibility = capital management. 
  • The Board has resolved to further expand S32’s capital management program by $110m to $2.1bn, leaving $302m to be returned to shareholders by 2 September 2022. 
  • The Company is still paying a dividend despite the uncertainty and volatility.   
  • Both Standard and Poor’s and Moody’s reaffirmed their respective BBB+ and Baa1 credit ratings.

Key Risk

  • Decline in key commodity prices.
  • Significant shock to global growth. 
  • Cost blowouts (inflationary pressures) / production disruptions.
  • Company fails to deliver on adequate capital management initiatives.
  • Adverse movement in currencies. 
  • Value destructive acquisition. 

1H22 Results Highlights. Relative to the pcp: 

  • Underlying revenue increased +32% to $4.602m driven by higher prices for most commodities, which combined with -4.6% reduction in total cost base amid divestment of South Africa Energy Coal, led to underlying EBITDA increasing +138% to $1,871m with margins improving +19.7% to 44%. 
  • Underlying EBIT increased +288% to $1,514m with margin improving +23.5% to 35.5%, further benefitting from a reduction in underlying depreciation and amortisation following the recognition of a non-cash impairment charge for Illawarra Metallurgical Coal in FY21. 
  •  Underlying earnings increased +638% to $1,004m and statutory profit after tax increased +1847% to $1,032m, benefiting from portfolio changes completed in FY21 and a broad recovery in commodity prices.

Company Profile

South32 (S32) is a globally diversified metals and mining company. S32’s strategy is to invest in high quality metals and mining operations where their distinctive capabilities and regional model enables them to extract sustainably performance. The regional model means their businesses are run by people from within the region. The company’s African operations are supported by a regional office in Johannesburg South Africa and Australian and South American operations by an office in Perth. 

  • Relative to the pcp: (1) 

(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
Technology Stocks

Fineos Shares Remain Disconnected to Fair Value

Two businesswomen working late in office look at documents

Business Strategy and Outlook

Fineos is a core software vendor to the global life, accident, and health, or LA&H, insurance industry. The firm generates revenue mainly from subscriptions and product implementation services. Fineos help insurers streamline workflow, save costs, and win new business. Fineos is currently migrating customers to a cloud-based offering (from on-premise products). This makes it easier to rollout new features and support at lower marginal costs, while also providing more recurring subscription revenue. 

The firm executes a classic land and expand strategy. Building on its leadership in claims and absence products, Fineos aims to cross-sell its broader product set including payments, billing, data and more. It intends to expand the use of the Fineos platform across multiple jurisdictions with existing multinational clients. Higher customer expectations cost pressures, regulatory requirements, or increasing competition are prompting insurers to switch from clunky internal systems to external software like that from Fineos. 

There is ample room for Fineos to deploy new modules to existing customers and grow penetration over time. This further increases switching costs..Fineos has built multiple reference accounts from doing business with large insurers, who help with additional business wins. Risks include competition from larger competitors, and customer concentration, which may limit price hikes. These may be offset by Fineos’ high switching costs and the risk aversion of insurer clients in changing core systems. Fineos’ product switching costs are contingent on the group continuing to invest (such as in product development) to add value to customers.

Fineos Shares Remain Disconnected to Fair Value

Fineos had good top line growth in first-half fiscal 2022. Revenue grew 24% from the previous corresponding period, or pcp, to EUR 65 million. Morningstar analysts have lowered its fair value estimate to AUD 4.80 from AUD 5.10. But Fineos shares remain at a discount to Morningstar analysts estimate of intrinsic value. Morningstar analysts think the market is underpricing: 1) the inherent switching cost in Fineos’ products, stemming from the risk aversion of its customers to switching providers; and 2) the trend of insurers migrating their business administration processes to the cloud, providing opportunity for Fineos to take share. These drivers underscore Morningstar analysts expectation that Fineos will keep growing market share, noting around 55% of insurers still use legacy systems that have limited functionality and higher operating costs

Financial Strength

Fineos’ balance sheet is appropriately sound. As of Dec. 31, 2021, Fineos has cash and equivalents of EUR 48.6 million and no debt. But current earnings quality is weak. Cash flows have historically been maintained by equity raises, rather than from the ordinary course of business. Cash conversion (operating cash flows to EBITDA) has been irregular. Investing cash flows frequently outstrip operating cash flows due to constant reinvestments, such as for product development or acquisitions. Net cash should grow as the business scales. Morningstar analysts estimate Fineos can generate sustainable positive free cash flows by fiscal 2026-27. Until Fineos reaches scale, however, prospective business acquisitions over the next five years will likely require equity raises. Alternatively, FINEOS can drawdown debt for acquisitions, but this could result in gearing levels and debt coverage deteriorating quickly. Longer-term, we expect Fineos to realise operating leverage via a combination of revenue growth and the scaling of fixed costs. This should help maintain growth in earnings and help the firm become more cash generative. 

Bulls Say

  •  Fineos has low penetration in a sleepy industry that’s ripe for disruption. Operating metrics are solid and trending positively. 
  • Switching costs are high. A competitor who creates a better product only wins half the race. The other half is to build credible reference accounts and convince insurers to switch, which can be lengthy ordeals. 
  • Morningstar analysts believe Fineos will remain the leader in its niche space, as it continues to reinvest in its products or pursue acquisitions, bolstering its capabilities, increase the switching costs of its product suite and expand the modules on offer.

Company Profile

Fineos Corp Holdings PLC is an Irish company engaged in providing software solutions that include management and administration of policies and claims to the life, accident, and health insurance industry. The company’s platform, Fineos AdminSuite, comprises Fineos Absence, Fineos Billing, Fineos Claims, Fineos Payments, and Fineos Provider, among other solutions.

(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.

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Daily Report Financial Markets

Indian Market Outlook – 4 March 2022

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Daily Report Financial Markets

Japan Market Outlook – 04 March 2022

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Daily Report Financial Markets

USA Market Outlook -04 March 2022

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Daily Report Financial Markets

European Market Outlook – 04 March 2022

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Global stocks

Tabcorp holdings remain challenged in their wagering & Media

Business Strategy and Outlook

  • The demerger of its Lotteries & Keno business (to be named The Lottery Corporation) from its Wagering & Media business (to be named Tabcorp) could unlock shareholder value as standalone business. 
  • Subdued outlook for wagering business and cost pressures likely to keep a lid on margin expansion in the near term.
  • Positive regulatory changes could drive out smaller uneconomical corporate bookmakers. 
  • Potential capital management initiatives.

Financial Strength

  • Competitive pressures within the core Wagering business.
  • Loss of market share.
  • Lack of product development.
  • Cost blowouts with failed investment in Sun Bets business in the UK.
  • Adverse outcome from any regulatory change. 

Bulls Say’s

  • Revenue of $2,934m was up +2.2%, variable contribution was mostly flat (-0.9%) at $942m and underlying EBITDA of $529m was down -5.5% vs pcp, mainly reflecting the impact of Covid-19 with a strong performing Lotteries and Keno businesses being offset by Wagering & Media and Gaming Services (impacted by venue restrictions and trading). Management delivered a further $16m in savings in 1H22 from 3S optimization program, bringing total savings to date from the program to approximately $46m.
  • The Company declared an interim dividend of 6.5 cents per share, which is down -13.3% on pcp and represents a payout ratio of 77% of net profit before significant items (and at the top end of 70 – 80% range).
  • Underlying NPAT of $187m was down -9.7% on pcp.
  • Gearing (gross debt / EBITDA) of 2.5x is at the lower end of target range of 2.5 – 3.0x.
  • Revenues of $1,073m were -9.8% weaker, with EBITDA of $148m down -34.8% on pcp as margin declined -530bps driven by higher generosities (due to highly competitive market) and advertising spend. Covid-19 related retail closures impacted wagering turnover (retail was down -36% vs digital up +2%) & revenue and media subscription revenues. Increased investment and Advertising & Promotion (A&P) expenses also impacted segment earnings.

Company Profile 

Tabcorp Holdings Ltd (TAH) is an integrated gambling and entertainment company listed in Australia, with operations overseas. The business operates three key segments – Wagering & Media, Keno and Gaming Services. These services are delivered to customers through TAH’s retail, digital and Sky media platforms. 

(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
Global stocks Shares

Telstra Ltd delivered strong earnings growth with declining NBN headwinds; Resulting in increased shareholder returns

Investment Thesis

  • Solid FY22 earnings guidance with management flagging a turning point as it expects mid to high single digit growth in FY22.
  • Solid dividend yield in a low interest rate environment. 
  • On market buyback of $1.35bn (post sale of part of Towers business), expected to be completed by end of FY22, should support its share price.
  • Additional cost measures announced to support earnings.
  • InfraCo provides optionality in the long-term. 
  • Despite intense competition, subscriber growth numbers remain solid. 
  • Company looking to monetize $2.0bn of assets. 
  • In the long-term, the introduction of 5G provides potential growth, however we continue to monitor the ROIC from the capex spend. 
  • TLS still commands a strong market position and has the ability to invest in growth technologies and areas (e.g., Telstra Ventures) which could provide room for growth.
  • Industry consolidation leading to improved pricing behavior by competitors. 
  • The Company continues to deliver strong underlying earnings growth which combined with declining NBN headwinds could see the Company increase shareholder returns via increased dividends which combined with the remaining 60% of the current buybacks should support the share price

Key Risk

  • Further cuts to dividends.
  • Further deterioration in the core mobile and fixed business.  
  • Management fails to deliver on cost-out targets and asset monetisation. 
  • Any increase in churn, particularly in its Mobile segment – worse than expected decrease in average revenue per users (or any price war with competitors).
  • Any network disruptions/outages.
  • More competition in its Mobile segment. Merger of TPG Telecom and Vodafone Australia creates a better positioned (financially and resource wise) competitor
  • Quicker than expected deterioration in margins for its Fixed segment.
  • Risk of cost blowout in upgrading network and infrastructure to 5G.

Key highlights 1H22                        1H22 Results Highlights. 

  • On a reported basis, total income declined -9.4% over pcp to $10.9bn, amid declines of ~$450m in one off nbn receipts and ~$200m in nbn commercial works. 
  • Operating expenses on an underlying basis declined -8.5% over pcp, with underlying fixed costs declining -8.9% over pcp enabled by ongoing drive to digitise and simplify processes, move to an agile workforce and continued migration of fixed customers to the nbn network as well as focus on rationalising 3rd party vendors and services. 
  • Underlying EBITDA increased +5.1% over pcp to $3.5bn driven by strong growth in Mobile. 
  • Net finance costs declined -22.5% over pcp to $238m, primarily due to a reduction in interest on borrowings and financing items relating to contracts with customers. 
  • Underlying EPS was up +55% over pcp to 6.2 cents per share, representing a strong start against T25 ambition for underlying EPS target of high teens CAGR from FY21-25. 
  •  Net cash provided by operating activities declined -5.7% over pcp to $3,246m mainly due to a $1,193m decline in receipts from customers, partly offset by a $955m reduction in payments to suppliers and employees. FCF (after lease payments) declined -9.1% over pcp to $1,675m

Company Profile

Telstra Corporation (TLS) provides telecommunications and information products and services. The company’s key services are the provision of telephone lines, national local and long distance, and international telephone calls, mobile telecommunications, data, internet and on-line. Its key segments are Mobile, Fixed, Data & IP, Foxtel, Network applications and services and Media

(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
Shares Small Cap

MVF reported solid 1H22 results; Growing above industry growth resulting in market share of 20.8% in key domestic markets

Investment Thesis

  • High barriers to entry with unique expertise and assets. 40-year heritage of leadership in science and innovation in ARS and women’s imaging, coupled with the depth of experience from the doctors and clinical team which will continue to underpin MVF’s future growth and maintain treatment success rates.
  • Aging Australian population and increased age of mothers (especially with the trend of more females choosing career over family until their early thirties) will provide favourable demographic tailwinds.
  • Improving balance sheet with flexibility to execute expansion strategies. Earnings increasingly become diversified as the Malaysian business gains momentum. 
  • Potential earnings diversification and growth via international expansion and increased presence in diagnostics.
  • Demonstrated capacity to perform well in terms of cost out and earnings growth despite tough conditions (i.e., lower cycle volumes).
  • Transparent and detailed disclosures.

Key Risk

  • Low growth environment impacting earnings.
  • Regulatory risk as changes in government funding may increase patient’s out-of-pocket expenses and thereby volume demand. 
  • Fluctuations in the availability and size of Medicare rebates may negatively influence the number of IVF cycles administered and overall industry revenue 
  • The Australian market does not rebound following this period of downturn. Population of males and females with fertility problems decline.
  • Loss of key specialists.
  • Loss of market share especially to low-cost providers, with one already appearing in Victoria.
  • Weakening economic activity resulting in increased unemployment leading to less disposable income to be spent in IVF treatment.
  • Execution of international forays into Malaysia goes poorly.

1H22 results summary:  Relative to the pcp:

  • Revenue increased +11.2% to $101m, largely driven by domestic stimulated cycles growth of +6.6% and average ARS revenue per stimulated cycle growth of +4.4%, partially offset by decline in ultrasound scan volumes. 
  • Adjusted EBITDA of $26.8m, increased +8.5% with volume leverage gained from increased domestic IVF activity partly offset by short-term margin declines in Ultrasound and Kuala Lumpur, pandemic related costs and $1m increase in medical malpractice and D&O liability insurance reflecting appropriate insurance policies in the current settings. 
  • Adjusted NPAT of $13.4m increased +11.7% and came in +3.1% ahead of management’s guidance. Reported NPAT declined -17.6% to $12.2m, primarily due to receipt of Job Keeper subsidies in pcp. 
  • FCF (excluding job keeper subsidy receipts in pcp) increased +51.6% to $9.7m, driven by 83% cash conversion of EBITDA to pre-tax operating cash flows and a decline of -42% in capex to $3.6m. 

Growing above industry growth and gaining market share

IVF industry fundamentals remain attractive including advanced maternal age and stable and continued government funding, which saw positive industry momentum continue in the half with industry volume growth at +3.6% and MVF recording above-industry growth of +6.6% resulting in market share gains of +70bps to an overall market share of 20.8% in key domestic markets. 

Company Profile

Monash IVF Group Ltd (MVF) offers assisted reproductive technology services, ultrasound services, gynecological services, in-vitro fertilization services, consultancy services and general clinical services to patients in Australia and Malaysia. MVF comprises 40 clinics and ultrasound practices and employs ~100 doctors and has a network of 650 associated health professionals. 

(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.