Investment Thesis:
- High quality company with a history of earnings and dividend growth.
- Massive opportunity to convert white-wood users as well as the palletisation of emerging markets.
- On-going on-market share buyback should support its share price.
- Strong management team with proven ability to maintain cost margins amidst cost pressures through strategic business efficiencies.
- Volume growth in the US Pallet business and improving outlook for margin.
- BXB’s scale, existing customer base and balance sheet will ensure it remains a market leader in the mid-to-long term.
- M&A activity
Key Risks:
- Competitive pressures and cost inflation leading to margin erosion, particularly in the North American market.
- Operations are very capital intensive.
- Any further loss of large contracts significantly reducing revenue and earnings.
- Weak economic conditions will lead to less consumption of FMCG, and hence less use of pallets.
- Volatile whitewood prices.
- Exposed to a wide range of currency and political risks.
- Reintroduction of widespread lockdowns in key regions.
Key Highlights 1H22 Results:
- Group revenue of US$2,766.4m, +8% YoY in constant currency terms with contribution from all three reporting segments. Key components of top line growth: price realisation across all regions to recover inflation and cost-to-serve pressures contributed +8%; new contract wins contributed +2%; and like-for-like volume growth was down -2% due to the strong Covid-19 related demand in the previous corresponding period and pallet availability constraints during this year.
- Underlying profit of US$481.2m was up +4%. Key components of group profit drivers over the half: impact of US$85m due to inflation across the group; US$93m impact from fuel and transport inflation across the group; US$35m impact from higher losses / lower returns (primarily in the U.S.); and US$24m costs associated with the transformation program.
- Underlying EPS of US21.3cps was driven by higher operating earnings and benefit from the share buy-back programme. The Company declared an interim dividend of US10.75cps (or AUD15.06cps), representing a payout ratio of 50% (within target range of 45-60%).
- Free cash flows after dividends over the half deteriorated by US$311.7m to an outflow of US$147.9m due to: (i) US$115m impact from the reversal of FY21 timing benefits comprising the US$80m of pallet purchases deferred from the prior year and US$35m relating to the timing of FY21 tax payments; (ii) capital expenditure jumped significantly due to lumber inflation of $270m and US$80m of additional pallet purchases (which were deferred from the prior year.
- BXB’s financial ratios remain well within <2.0x financial policy, with net debt / EBITDA at 1.37x vs 1.18x in pcp.
Company Description:
Brambles Limited is a supply-chain logistics company operating in more than 60 countries, primarily through the CHEP brands. Headquartered in Sydney, its largest operations are in North America and Western Europe. The company’s main segments are: pallets, reusable produce crate (RPCs) and containers. It services customers in the fast-moving consumer goods industries and also operates specialist container logistics businesses serving the automotive, aerospace, and oil and gas sectors. It employs more than 14,500 people and owns more than 550 million pallets, crates and containers through a network of more than 850 service centres.
(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
Medibank is Australia’s largest private health insurer operating under the Medibank and ahm brands. The dual brand strategy has successfully allowed the group to offer differentiated pricing and messaging to grow members and profits. Despite the “free” universal public system in Australia, around 45% of Australia’s population have private hospital cover due to taxation benefits and penalties, shorter wait times, and a choice of doctor and hospital. We expect government policy settings, which promote the take up and retention of private health insurance products, to remain in place. With an ageing population, higher demand for more intense healthcare will further pressure the public health system.
Despite larger players generating respectable return on equity on mid-single-digit profit margins, smaller providers have less capacity to absorb the expected claims inflation. This could eventually lead to industry consolidation, or at the least a pull-back in marketing expenses and policyholder acquisition costs. Medibank’s Other Health Services division provides in-home healthcare services such as nursing, rehabilitation, and health coaching for corporates. Medibank health also includes the sales of travel, life, and pet insurance, where Medibank is not the underwriter but is paid a commission.
Financial Strength
Medibank’s first-half fiscal 2022 profit slipped 2.7% to AUD 220 million but was in line with our broadly unchanged earnings forecasts. In a debt-free position Medibank is in sound financial health. It is forecasted that Medibank can fund for long-term organic growth from cash flows, while maintaining the current 75% to 85% target dividend payout range. As at Dec. 31, 2021, Medibank held AUD 1.95 billion in capital, equating to 13% of annual premiums, the top end of the firm’s 11%-13% target range. Given low claims volatility in health insurance the insurer could carry some debt, but given a large acquisition is not expected, we believe the conservative balance sheet is likely to remain a feature of Medibank. Investment assets of AUD 2.8 billion were allocated 18% to cash, 61% to fixed income, and 21% to equities, property and other assets as at Dec. 31, 2021.
Bulls Say’s
- Industry growth is tied to a steadily increasing population, ageing demographics and the rise in healthcare spending. Governments will continue to incentivise participation in private health insurance to share the burden of escalating healthcare costs.
- Premium growth is generally tied to the increasing cost of healthcare.
- The symbiotic relationship with the private hospital operators and buyer power over general practitioners is a key strength of Medibank’s business model. The majority of private hospital income is paid by the insurers.
Company Profile
Previously owned by the Australian government, Medibank is the largest health insurer in Australia. Its two brands, Medibank Private and ahm, cover over 4.8 million people. Medibank and Australia’s fourth-largest health fund NIB Holdings are the only listed health insurers. In addition to private health insurance, the firm provides life, pet, and travel insurance, as well as health insurance for overseas students and temporary overseas workers. The Medibank Health division provides healthcare services to businesses, governments, and communities across Australia and New Zealand.
(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
It is held Cummins will continue to be the top supplier of truck engines and components, despite increasing emissions regulation from government authorities. For over a century, the company has been the pre-eminent manufacturer of diesel engines, which has led to its place as one of the best heavy- and medium-duty engine brands. Cummins’ strong brand is underpinned by its high-performing and extremely durable engines. Customers also value Cummins’ ability to enhance the value of their trucks, leading to product differentiation.
The company’s strategy focuses on delivering a comprehensive solution for original equipment manufacturers. It is likely Cummins will continue to gain market share, as it captures a larger share of vehicle content. This is largely due to increasing emissions regulation, which allows Cummins to sell more of its emissions solutions, namely its aftertreatment systems that convert pollutants into harmless emissions. Additionally, Cummins stands to benefit from the electrification of powertrains in the industry. The company has made progress in the school and transit bus markets. Long term, it is alleged the truck market to also increase electrification. The pressure to manufacture more environmentally friendly products is forcing truck OEMs to evaluate whether it’s economically viable to continue producing their own engines and components or to partner with a market leader like Cummins. It is seen this play out recently, through the increase in partnership announcements for medium-duty engines with truck OEMs. It is anticipated some OEMs will opt to shift investment away from engine and component development, leaving it to Cummins.
Cummins has exposure to end markets that have attractive tailwinds. In trucking, it is likely new truck orders will be strong in the near term, largely due to strong demand for consumer goods. In good times, truck operators replace aging trucks and opt to expand their fleet to meet strong demand. Longer term, it is projected Cummins will continue to invest in BEVs and fuel cells to power future truck models. It is foreseen a zero-emission world is inevitable, but it is held Cummins can use returns from its diesel business to drive investments.
Financial Strength
Cummins maintains a sound balance sheet. In 2021, total outstanding debt stood at $3.6 billion, but the firm had $2.6 billion of cash on the balance sheet. In 2020, the company issued $2 billion of long-term debt at attractively low rates, some of which was used to pay down its commercial paper obligations. Cummins’ strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and returns cash to shareholders. In terms of liquidity, it is projected the company can meet its near-term debt obligations given its strong cash balance. It is also found comfort in Cummins’ ability to tap into available lines of credit to meet any short-term needs. Cummins has access to $3.2 billion in credit facilities.Cummins can also generate solid free cash flow throughout the economic cycle. It is held the company can generate over $2 billion in free cash flow in analysts midcycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. Additionally, It is alleged management is determined to improve its distribution business following its transformation efforts in recent years. It is foreseen Cummins can improve the profitability of the business through efficiency gains, pushing EBITDA margins higher in the near term. These actions further support its ability to return cash to shareholders. In Analysts’ view, Cummins enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.
Bulls Say’s
- Strong freight demand in the truck market should lead to more new truck orders, substantially boosting Cummins’ revenue growth.
- Cummins will benefit from increasing emission regulation, pushing customers to buy emissions solutions, such as aftertreatment systems that turn engine pollutants into harmless emissions.
- Increasing emission standards could push peers to rethink whether it’s economically viable to continue manufacturing engines and components, benefiting Cummins.
Company Profile
Cummins is the top manufacturer of diesel engines used in commercial trucks, off-highway equipment, and railroad locomotives, in addition to standby and prime power generators. The company also sells powertrain components, which include filtration products, transmissions, turbochargers, aftertreatment systems, and fuel systems. Cummins is in the unique position of competing with its primary customers, heavy-duty truck manufacturers, who make and aggressively market their own engines. Despite robust competition across all its segments and increasing government regulation of diesel emissions, Cummins has maintained its leadership position in the industry.
(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
With its lease renegotiation with Windstream (which makes up about 60% of Uniti revenue and over 80% of EBITDA) now finalized, Uniti is on much more stable financial footing and can continue on the path it was on prior to the Windstream uncertainty, maintaining itself with reliable returns and cash flow from Windstream while diversifying its business and adding more indefeasible rights of use agreements on its fiber, which carry long-term certainty and virtually no operating costs.
Diversification has come primarily via acquisitions and fiber network construction, which spawned the firm’s fiber infrastructure segment, where Uniti leases dark and lit fiber and small cells to wireless carriers and other enterprises. While it is generally skeptical about the economics of such businesses, it is in view Uniti as better positioned than many competitors because it focuses on second- and third-tier cities, where it is not supported competition is quite as intense. For example, Crown Castle explicitly says its footprint covers only the largest U.S. cities. In addition, the major cable providers in the United States are absent over much of Uniti’s footprint. It is alleged fiber use to continue growing substantially given constantly increasing data consumption across wired and wireless networks, and it is likely Uniti can capitalize in its niche.
It is also seen Uniti’s original leasing business, where it has engaged in sale-leaseback transactions to buy other companies’ fiber and immediately lease it back at attractive rates, but it is unconvincing it can materially grow beyond Windstream. It is not foreseen Uniti adds much value beyond providing capital, so it is held virtually any firm with access to cheap financing can compete. As such, it is anticipated suitors will compete on price, and finding sizable deals at attractive rates will be difficult.
Financial Strength
Uniti is a highly leveraged company, with net debt of 5.8 times adjusted EBITDA at the end of 2021 and a debt/capital ratio of over 100%. The resolution of the Windstream lease renegotiation significantly improves Uniti’s financial position and makes it unlikely to be in near-term danger of bankruptcy, but it still has substantial risk, especially if stress in the financial markets results from a global economic downturn. In addition, effects from the Windstream lease amendment remove flexibility Uniti needed to execute its diversification and expansion strategy. Uniti cut its quarterly dividend from $0.60 to $0.05 in March 2019 and has since raised it to $0.15. It is likely to raise it only marginally, which it needs to do to continue qualifying as a real estate investment trust. With the reduced dividend level, it is held the firm can make the required interest and principal payments on its debt while maintaining a debt/EBITDA ratio of about 6.0. The firm has no significant debt maturities until 2023, when more than $1 billion, or about 20% of its total debt, comes due. Beyond survival, it is likely Uniti’s weak financial position inhibits its ability to operate as it had planned. It was already highly leveraged, and it is anticipated it intended to rely on equity issuance to fund expansion and diversification. If its stock remains depressed relative to prior years, which is justified if it loses a significant portion of Windstream revenue, it is likely it will lack currency needed to buy additional assets.
Bulls Say’s
- Uniti’s renegotiation of its Windstream lease gives the ability to add new leases to existing fiber, which can be very lucrative, as it requires little new spending.
- Uniti’s sale-leaseback transactions provide nearly 100% margins, require no spending or upkeep on Uniti’s part, and lock in high-return revenue streams for 15 years or longer.
- There is less competition to provide fiber exists in the second- and third-tier cities where Uniti operates, and Uniti’s network will be in demand to facilitate evergrowing data transport needs.
Company Profile
Uniti is a REIT with about 130,000 route miles of fiber in the U.S., primarily in the Southeast. Uniti reports its business in two segments: leasing and fiber. Leasing currently makes up about two thirds of total revenue and consists mostly of Uniti’s master lease agreement with Windstream. Uniti was spun out of Windstream in 2015 with a substantial portion of Windstream’s network assets, and it immediately leased the entire portfolio back for Windstream’s exclusive use. Other leasing revenue stems from sale-leaseback transactions with other fiber holders. Uniti generates fiber revenue by leasing dark and lit fiber to wireless carriers and other enterprises. (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.
