Investment Thesis
- Market leading position (significantly ahead of the nearest competitor).
- Growing global trade and increasingly globalization of products sold.
- High degree of revenue visibility and low customer annual attrition rates.
- R&D spend will ensure product/services are enhancing WTC products. WTC’s vision is to be the operating system for global logistics. Having completed 39 acquisitions since its IPO in 2016, WTC has assembled significant resources and development capabilities to fuel its CargoWise technology pipeline.
- Scalability of the business model.
- Geopolitical tensions considered by management as “tailwinds” due to higher consolidation of the logistics software industry.
Key Risks
- Company announces another earnings downgrade.
- Organic growth could moderate further, which may no longer warrant such a lofty valuation. However, organic growth has improved over FY19.
- Management noting that revenues from recent acquisitions actually declined and offered little margin. This means the return from these acquisitions could take longer than management’s expectations.
- Competitive threat (new product/technological advancements).
- Disruption to technology (data breach).
- Adverse currency movements.
1H22 Results: Relative to the pcp:
- 1H22 Total Revenue of $281.0m, up +18% (+22% ex FX) on 1H21.
- CargoWise revenue was up +29% (+33% ex FX) to $193.0m, driven by Large Global Freight Forwarder rollouts, new customer wins, price and increased existing customer usage.
- Acquisition (non-CargoWise) revenue of $87.9m, down -1% (up +2% ex FX).
- Market penetration momentum continuing – two new global rollouts secured in 1H22 – FedEx and Access World – and Brink’s Global Services (Brink’s) signed post 31 December 2021.
- Ongoing product development delivered 589 CargoWise new product features and enhancements and continued expansion of the CargoWise ecosystem.
- Organization-wide efficiency and acquisition synergy program well-progressed – $20.2m of gross cost reductions in 1H22 (net benefit $19.7m).
- EBITDA of $137.7m up +54% driven by revenue growth and cost reductions. Margin of 49%, up 12bps. CargoWise’s 1H22 EBITDA margin of 58% represents an increase of 4pp on 1H21.
- Underlying NPAT of $77.3m, up +77%.
- WTC generated strong free cash flow of $90.3m, up +85%.
- WTC retained a strong balance sheet, with cash as at 31 December 2021 of $380.3m and no outstanding debt excluding lease liabilities. WTC has an undrawn, unsecured, four-year, $225m, bi-lateral debt facility, to fund future growth.
- WTC’s Board declared a fully franked interim ordinary dividend of 4.75cps, which equates to payout ratio of 20% of Underlying NPAT.
Company Profile
WiseTech Global (WTC), founded in October 1994, is a leading provider of software to the logistics services industry globally. WTC develops, sells and implement software solutions that enable logistics service providers to facilitate the movement and storage of goods, domestically and internationally. WTC’s software assists their customers to better address and adapt to the complexities of the logistics industry while increasing their productivity, reducing costs and mitigating risks. WTC services over 6,000 customers across more than 115 countries with offices in Australia, New Zealand, China, Singapore, South Africa, United Kingdom and the United States.
(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
- Higher oil prices benefit ORG’s APLNG project (higher revenues).
- Balance sheet position is being restored with management focused on getting the debt covenants back to an investment grade level.
- Achieving milestones within the APLNG project.
- On-going focus on operating cost and capital expenditure reduction.
- Increasing dividend profile and with a restored balance sheet the Company can also consider other capital management initiatives.
- Rationalization of asset portfolio, including asset sales and the IPO of its conventional upstream business should help improve the balance sheet position.
Key Risks
- Exploration and production risks.
- Lower energy prices, particularly oil prices (for its APLNG project).
- Structural change in energy markets & increased competition.
- Not meeting cost-out targets.
- Highly geared balance sheet, with the company not being able to reduce debt fast enough.
1H22 Key Highlights
- Underlying EBITDA declined -4.8% over pcp to $1,099m, as increased earnings from Australia Pacific LNG amid higher oil and gas prices were more than offset by expected lower earnings in Energy Markets reflecting lower retail tariffs (set in FY21 when wholesale electricity prices were at lows due to subdued economic activity and increased renewables penetration) and higher energy procurement costs.
- Underlying profit increased +18% over pcp to $268m, driven by strong commodity prices, however, the Company recorded statutory loss of $131m, reflecting the one-off impairment and net capital gains tax expense associated with the $2bn sale of its 10% interest in Australia Pacific LNG.
- Operating cash flow was an outflow of $79m vs inflow of $669m in pcp, amid lower earnings from Energy markets, higher working capital primarily due to timing of LNG cargo delivery and oil hedging and LNG trading losses. FCF (including major growth projects of Octopus equity investment of $260m and Kraken licence implementation costs of $37m) was an outflow of $112m vs inflow of $594m in pcp.
- Adjusted net debt increased +10.6% over 2H21 to $5.133bn, driven by the consideration associated with the investment in Octopus and higher working capital associated with the payment for an LNG cargo partially offset by APLNG cash distributions. (5) The Board declared an unfranked interim dividend of 12.5cps, representing 66% of FCF (excluding major growth projects), with partial franking expected to be restored in FY23.
Sale of 10% interest in APLNG – expected to restore balance sheet flexibility
Management executed an agreement to sell 10% of APLNG for net proceeds of $2.12bn (ORG retains 27.5% of shareholding, existing two APLNG board seats and upstream operatorship), with sale expected to be completed in 3Q22 (first half of CY22) and proceeds used to restore balance sheet flexibility with post sale adjusted Net Debt/adjusted Underlying EBITDA and gearing ratio declining to lower end of the target ranges of 2-3x and 20-30% from current levels of 3.9x and 34%, respectively. It will also provide FY22 net interest saving of $45-65m
Coal-fired generation
Management has submitted notice to AEMO for the potential early retirement of Eraring Power Station in August 2025 (vs prior targeted closure in 2032) and plans to install a large-scale battery of up to 700 MW at the site.
Company Profile
Origin Energy (ORG) is an integrated energy company with operations in exploration, production, generation and the sale of energy to millions of households and businesses across Australia. The Company has extensive operations across Australia and New Zealand and pursuing opportunities in the fast-growing energy markets of Asia and South America. The Company has two main segments: (1) Energy Markets – retail sales of electricity, gas and other customer solutions; electricity generation; and wholesale trading of electricity and gas. (2) Integrated Gas – consists of upstream exploration, development and production; the segment also holds the 37.5% ownership in Asia Pacific LNG project (APLNG).
- Sale of 10% inte(Sourc (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
- Inventory issue remains a downside risk but can also provide upside surprise should management work through the excess inventory in its distribution channels. It appears the inventory is at target levels for some of the key channels.
- Wining market share in Australia and China.
- Growing consumer demand for health and well-being globally.
- Demand growth in China for premium infant formula product.
- Expansion into new priority markets, aided by the capabilities of Fonterra.
- US expansion provides new markets + opportunities.
- Key patents provide barrier to entry.
- Takeover target – the Company was the subject of a takeover bid in 2015.
Key Risks
- Management fails to meet its revised FY21 guidance.
- Chinese demand underperforming market expectations.
- Disruption to A2 milk supply.
- Increased competition, including private labels & competitors developing products or branding that erode the differentiation of A2M branded products from other dairy products.
- Expiration of A2M’s intellectual property rights may weaken or be infringed by competitors.
- Withdrawal of A2M product from international markets due to market share loss or lack of market penetration.
1H22 Results Highlights
- Revenue was marginally lower, down -2.5% to $661m but in line with guidance, and up +24.8% on 2H21, due to (i) China label IMF sales were constrained in 1Q22 to rebalance distributor inventory levels with sales falling -11.4% for 1H22 vs pcp; (ii) English and other label IMF sales fell -9.8% in 1H22 vs pcp with lower market share; (iii) ANZ liquid milk sales were up with higher market share, while U.S. liquid milk sales were down.
- EBITDA fell -45.3% to $97.6m due to lower revenue and gross margin as well as a +37.3% increase in marketing investment vs pcp. EBITDA margin of 14.8% in 1H22 (17.3% ex-MVM) was weaker versus 26.4% in 1H21. Gross margin percentage fell to 46.2% (with underlying gross margin of 50.7% excluding MVM), due to inclusion of MVM, adverse product mix and cost headwinds (especially raw milk and freight costs), partially offset by price increases.
- NPAT including non-controlling interest was down -53.3% to $56.1m.
- Balance sheet remains strong with closing net cash of $667.2m due to high operational cash conversion during 1H22. Inventory at the end of the period was $127.9m, higher than at the end of FY21, due to the inclusion of MVM.
- A2M noted the Mataura Valley Milk (‘MVM’) acquisition and strategic partnership with China Animal Husbandry Group (‘CAHG’) was completed in July 2021 and fully consolidated into the results.
Company Profile
The a2 Milk Company Limited (A2M) sells a2 brand milk and related products. The company owns intellectual property that enables the identification of cattle for the production of A1 protein free milk products. It also sources and supplies a2 brand milk in Australia, the UK and the US, exports a2 brand milk to China, and distributes and markets a2 brand milk and a2 Platinum brand infant nutrition products in Australia, New Zealand, and China
(Source: BanayanTree)
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
EOG Resources is one of the largest independent oil exploration and production companies. It derives almost all of its production from shale fields in the U.S., with a small incremental contribution from Trinidad. The firm differentiates itself by attempting to identify prospective areas before most peers catch on, enabling it to secure leasehold at attractive rates (rather than overpaying for land after the market overheats). It has only one large-scale M&A deal under its belt, related to its 2016 entry to the Permian Basin. Nevertheless, the firm is also active in most other name-brand shale plays, including the Bakken and Eagle Ford. Additionally, the focus now includes the Powder River Basin (Wyoming) and a new natural gas play in southern Texas that the firm has christened “Dorado.”
The firm’s acreage contains over 10,000 potential drilling locations that management designates as “premium.” These are expected to generate internal rates of return of at least 30% (assuming $40/bbl WTI and $2.50/mcf natural gas). However, management is now prioritizing a sizable subset, 6,000-plus locations, designated “double premium.” These are expected to deliver twice the returns at the same commodity prices. Opportunities that don’t currently satisfy this criteria may be upgraded later, if the company can reduce the expected development cost or boost the likely flow rate of the well. During the past several years, EOG added more premium locations than it drilled, resulting in a net increase to its premium drilling opportunities, and the firm expects to do the same with its double premium inventory.
Financial Strength
Overall, EOG’s financial health is excellent compared with peers, giving it the ability to tolerate prolonged periods of weak commodity prices, if necessary. It has more cash than debt, generates substantial free cash under a wide range of commodity scenarios, and aims to retain a substantial cash cushion to enable it to take advantage of downcycles by repurchasing stock without unduly stressing the balance sheet at an inopportune time.The firm holds about $5.1 billion of debt, resulting in very low leverage ratios. At the end of the most recent reporting period, debt/capital was 19% and net debt/EBITDA was slightly negative. Furthermore, the firm also has a comfortable liquidity stockpile, with $5 billion cash and another $2 billion available on its undrawn revolver (though a portion of this will be used to fund the firm’s $600 million special dividend payable March).
Bulls Say’s
- EOG is among the most technically proficient operators in the business. Initial production rates from its shale wells consistently exceed industry averages.
- EOG’s vast inventory of premium drilling locations provides a long runway of low-cost resources.
- EOG often adds new premium drilling opportunities to its queue via exploration or by using improved knowhow and technology to “upgrade” opportunities that did not previously qualify.
Company Profile
EOG Resources is an oil and gas producer with acreage in several U.S. shale plays, including the Permian Basin, the Eagle Ford, and the Bakken. At the end of 2021, it reported net proved reserves of 3.7 billion barrels of oil equivalent. Net production averaged 829 thousand barrels of oil equivalent per day in 2021 at a ratio of 72% oil and natural gas liquids and 28% natural gas.
(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.
