Investment Thesis
- CGF is trading on fair valuation, with a 2-yr forward PE-multiple of 14.3x and price-to-book value of 1.0x.
- Exposure to an attractive retirement income market, with strong long-term growth tailwinds.
- Near-term challenges are likely to be priced in at current valuations, in our view, with investor expectations reset lower.
- Solid capital position.
- Further cost initiatives leading to reduction in the already low cost-to-income ratio.
- Two complementary businesses both with leading market positions.
Key Risks
- Weaker than expected annuity sales growth within its Life (annuity) segment.
- Structural and reputational detriments from the Royal Commission lasting longer than anticipated.
- Any increase in competition from major Australian banks in annuities.
- Weaker than expected net inflows for the Funds Management segment (possibly from lower interest levels from financial planners/advisers/investors).
- Weaker than expected performance of boutique funds within its Funds Management segment.
- Lower investment yields.
- Uncertainty over capital requirements of deferred lifetime annuities.
Fund Management
- EBIT increased +28% to $45m driven by +26.4% increase in FUM-based fee income with average FUM up +26% and a steady FUM-based margin of 16.7bps, partially offset by -50% decline in performance fees and +15% increase in expenses. Funds Management ROE increased +600bps to 33.8%.
- FUM increased by +20% to $109bn, with net flows reaching $900m, reflecting a strong contribution from retail clients, with momentum continuing into the start of 2H22 with the business securing a GBP1bn UK fixed income mandate.
- Investment performance remained strong with 92%, 96% and 94% of FUM outperforming the benchmark over 3 years, 5 years and since inception, respectively.
Company Profile
Challenger Ltd (CGF) is an Australian-based investment management firm managing $78.4 billion in assets as of December 2018. CGF operates two core segments: (1) a fiduciary Funds Management division; and (2) APRA-regulated Life division. Challenger Life Company Ltd (Challenger Life) is Australia’s largest provider of annuities.
(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:
- MP1 is a global Software Defined Network provider, focusing on cloud connectivity. As such, the Company is leveraged to the rapid growth of global cloud and data centres and is in a strong position to benefit from the rollout to new cloud and data centre regions. Key macro tailwinds behind MP1’s sector: (1) adoption of cloud by new enterprises; (2) increased level of investment and expenditure by existing customers; and (3) more and more enterprises looking to use multiple cloud products/providers, which works well with MP1’s business model.
- MP1 has a scale advantage over competitors. MP1 has over 600 locations around the globe. MP1 has significant scale advantage over competitors and whilst replicating this scale is not necessarily the difficult task, it will take several years to do so during which time MP1 will continue to add locations and customers using the scale advantage.
- Strong R&D program ensuring MP1 remains ahead of competitors.
- Strong cash balance of $104.6m.
- Strong relationship with data centres (DC). MP1 has equipment installed in 400 data centres, so MP1 is a customer of data centres. MP1 also drives DCs interconnection revenue. Whilst several data centres like NEXTDC, Equinix provide SDN (Software Defined Network) services, it is unlikely data centres will look to change their relationship with (or restrict) MP1 given they are designed to be neutral providers to network operators. Further, given MP1’s existing customer base and connections with cloud service providers, it would be very difficult for data centres (without significant disruption to customers/cloud service providers) to change the rules for MP1.
Key Risks:
- High level of execution risk (especially with respect to development).
- Revenue, cost and product synergies fail to eventuate from the InnovoEdge acquisition.
- Heavy reliance on third party partners (especially data centre providers and cloud service providers).
- Data centres like NEXTDC, Equinix provide SDN services and decide to restrict MP1 in providing their services.
- Disappointing growth (in terms of expanding data centre footprint, customers, ports, Megaport Cloud Router).
Key highlights:
(1) Revenue increased +42% over pcp to $51.2m, driven by increased usage of services across all regions, with North America delivering strongest growth across all regions, increasing +55% over pcp, followed by Europe (+35% over pcp) and Asia Pacific (+28% over pcp). Monthly recurring revenue (MRR) increased +46% over pcp to $9.2m, driven by strong customer growth compounded with a 5% increase over pcp in services per customer.
(2) Profit after direct costs improved +69.4% over pcp to $30.9m, driven by revenue growth and a controlled network cost.
(3) Opex increased +42% over pcp with employee costs increasing +40% over pcp amid investment in headcount to support business growth (employee costs as a percentage of revenue declined -100bps over pcp to 55%), marketing (+126% over pcp) and travel (+1481% over pcp) costs increasing amid a gradual return of travel and conference activities following global easing of Covid-19 restrictions, and IT costs increasing +106% over pcp due to expensing of Software as a Service (SaaS) costs, previously capitalised, following a change in accounting policy.
(4) The Company achieved 2,455 customers (up +7.4% over 2H21) across 768 Enabled Data Centres (420 located in North America, 208 in EMEA and 140 in Asia Pacific).
(5) The Company ended the half with cash and equivalents position of $104.6m, down -23.2% over 2H21.
Company Description:
Megaport Ltd (MP1) is a software-based elastic connectivity provider – that is, it is a global Network as a Service (NaaS) provider. MP1 develops an elastic connectivity platform providing customers interconnectivity and flexibility between other networks and cloud providers connected to the platform.
(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.
Process:
The philosophy of the team is to identify mispricing within sectors and securities, allocating active risk in areas in which it has conviction while ensuring the portfolio remains diversified to avoid singular themes being pervasive through the portfolio. The team takes account of global macro insight from the global investment strategy committee and overlays its domestic market knowledge to come up with a base-case expectation looking forward six to nine months depending upon its conviction. In addition to this, the team develops multiple upside and downside scenarios as a risk-management framework. Based on the base case, the team engages in quantitative and qualitative analysis to determine sector allocation. The quant component is where the team will look at historical and relative spread comparison within and across sectors. The outcomes of this analysis are then overlaid by qualitative insight considering technical demand, credit, and liquidity dynamics. The culmination of this analysis in conjunction with the base-case expectation guides the actual portfolio positions. The fund looks to invest across government, semi government, supranational, credit, inflation-linked bonds, securitised assets, and cash. The team is clear about allocating only active positions where it has a high degree of conviction and an expected positive reward profile. Holdings are disclosed daily. BNDS runs as a separate vehicle to the flagship unlisted fund and has some additional restrictions on the amount of residential mortgage-backed securities it can hold owing to requirements on holdings being issued by a listed entity.
Portfolio:
The portfolio can invest across government, semi government, supranational, credit, securitised assets, inflation-linked bonds, and cash. As of November 2021, more than 40% of the portfolio was invested in investment-grade corporate bonds, around 25% in semi government issues, 20% in government, 10% in supranational, with a small amount of mortgage-backed and asset-backed securities. This allocation has been relatively consistent over time, and cash levels have been low, generally a few percentage points, even in times of stress like the early-2020 market plummet. Relative to the Bloomberg AusBond Composite Index, the fund has been long underweight in government bonds, choosing instead to invest more broadly across spread assets. Given the fund’s constraints, the overall portfolio remains high-quality, with 35% of assets in AAA rated issues, no allocation below investment-grade, and a weighted average credit rating of AA-. Portfolio manager Anthony Kirkham and the Western team have historically been opportunistic within their mandate, though duration is kept within plus or minus 1.0 year relative to the benchmark. Active duration moved short relative to the benchmark around mid-2021 but came back in line with the index around yearend. Like most Australian bond managers, they entered 2021 overweight in credit, indicative of their opportunistic profile. Susquehanna Financial Group is the primary market maker, and bid-ask spreads have remained respectable over its relatively short life, moderately higher than passive Australian bond ETFs, which is to be expected. This vehicle contained about AUD 190 million in February 2022 and can be used as a core defensive allocation.
People:
The fund is managed by a seasoned team of investors who remain dedicated to this strategy. The team is led by Anthony Kirkham, who has had more than 30 years of wider experience, including nearly two decades at Western Asset Management, and leading this strategy since 2002. Kirkham has credit analyst, dealer, and portfolio manager experience working for Commonwealth Bank, Metway Bank, RACV Investments, and Citigroup. He is supported by Damon Shinnick, who is a portfolio manager with a focus on credit portfolios. Shinnick has 22 years of experience within the industry including 11 years at the firm. Shinnick has also held an array of portfolio manager roles previously at Challenger Financial, Lehman Brothers, Pension Corporation LLP, and HSBC. Craig Jendra is also a key member of the team, joining Western in 1996 and being promoted to portfolio manager in 2000. Jendra has 25 years of industry experience with previous roles at Citigroup and JPMorgan. The three portfolio managers are supported by analyst Sean Rogan, who joined in 2002 and has 32 years’ industry experience; dedicated investment dealer Anthony Francis; and portfolio analyst Lawrence Daly, who ensures risk characteristics are maintained and adhered to. Together, the group boasts more than 25 years’ industry experience and is among the most impressive in its peer group.
Performance:
BNDS began in November 2018. It has closely tracked its equivalent unlisted fund strategy, Western Asset Australian Bond, over that span. The long-running unlisted fund has done well over the long term, especially compared with peers. It has delivered returns above the Bloomberg AusBond Composite Index, net of fees, over the past decade. That is ahead of its target return of 75 basis points (gross of fees) over the benchmark and market cycle. A tracking error of 100 basis points is targeted. Perhaps more impressive, though, is that these results put the strategy’s flagship A share class in the first quartile of its Morningstar Category over the trailing three, five, and 10 years to December 2021. Sector allocations and credit exposure continue to drive performance. Most of the outperformance has stemmed from the fund’s allocation to higher-spread assets in lieu of government bonds, especially credit. To put this into context, the portfolio has had around 40%-50%exposure within credit since 2002. Adding the strategy’s allocation to supranationals to the mix, this exposure goes up to almost 60%. While this increases the strategy’s exposure to wider credit spreads, it remains high quality, and the majority of it is shorter-dated to control for spread risk. Owing to the mandate restrictions, the fund can’t and doesn’t take large-duration bets. Duration was the second largest contributor to the portfolio in 2021, but has been a small negative attributor over the long term, largely a result of the fund’s short-duration bias in an environment of shrinking bond yields.
(Source: Morningstar)
Price:
It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s middle quintile. That’s not great, but based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we think this share class will still be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver.
(Source : Morningstar)
About Funds:
BetaShares Western Asset Aus Bd ETF BNDS is a compelling choice for domestic fixed-interest exposure owing to its best-in-class team and straightforward approach. BNDS provides daily holdings to the market and has grown steadily since it began in November 2018 with active external market makers. Anthony Kirkham, head of investment/portfolio manager, is the leader of this strategy, and we have high regard for his investment knowledge and skills. Kirkham is supported by an experienced investment team, consisting of Craig Jendra and Damon Shinnick, co-portfolio managers, and Sean Rogan, research analyst. The stability of this group and quality of the research are impressive. There’s appeal to the strategy’s simplistic and relatively conservative investment process, which seeks mispriced domestic fixed-interest securities within various sectors. Sector and issuer limits are applied to help damp volatility in different environments. Still, sector allocation and issuer selection has been strong over the past decade, emphasising the team’s rigourous analysis in these areas. However, this can be a hindrance if yields rise unexpectedly. That said, the portfolio’s active duration was moved around judiciously and contributed strongly in 2021, a testament to the team’s ability to interpret and capitalise on shifting economic conditions. The track record here has also been consistent and solid over multiple time frames, and the annual 0.42% fee is competitive relative to peer
(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.
Process:
Lead manager Joe Higgins continues the thoughtful relative value approach that has been in place both here and on his other charge, TIAA-CREF Core Bond TIBDX. This strategy earns an Above Average Process Pillar rating. Higgins has the ultimate authority in ensuring what holdings go into the portfolio but draws heavily on the strength and expertise offered by the sector managers, analysts, and macroeconomic strategists in identifying relative value opportunities across the fixed-income universe. The strategy can invest in everything from corporate bonds and mortgages to municipal bonds and emerging-markets debt, with the higher-risk sectors like high-yield bonds, bank loans, and emerging-markets debt ranging between 10% and 30% depending on the team’s outlook and risk appetite. The strategy has avoided taking extreme positions in any of those areas and has generated its alpha from a variety of sources instead of relying on any one area. This approach has benefited investors through steady-as-it-goes performance rather than wild swings based on drastic portfolio shifts, and it has worked through a variety of market environments.
Portfolio:
As of December 2021, the portfolio’s largest exposures were to investment-grade corporate bonds (24.2% of assets), agency mortgage-backed securities (18.6%), and emerging-markets debt (10.2%). The emerging markets exposure rarely if ever broke double-digit threshold, but its allocation has been on the upswing since March 2020 given the portfolio managers’ belief in its ability to outperform over the long term. The emerging markets’ relative lack of direct correlation to domestic corporate moves, as well as premium on offer from new issuance, make them attractive. This overweighting also makes sense to the managers in context of a rising rate environment, as they seek refuge in assets that are not hypersensitive to rate increases. That 10.2% stake in emerging-markets debt is almost 4 times the category peer median, though, and about half of it is rated below-investment-grade. Coupled with 5.6% in high-yield corporates, 4.3% in nonagency mortgages, and 2.7% in senior loans, the “plus” sector exposure of this portfolio amounted to 22.7% at the end of December 2021. This edges toward the higher half of the 10%-30% “plus” budget and represents increased credit risk, but the strategy’s yield (a proxy for risk) has hugged quite closely to the peer median in the past couple of years, indicating a reasonable level of risk-taking.
People:
Joe Higgins, who replaced long time lead manager Bill Martin at the end of 2020, is a seasoned and capable manager supported by three experienced comanagers and a robust analyst team. The strategy earns an Above Average People Pillar rating. Higgins had been leading the Core strategy since 2011, has been with the firm since 1995, and was previously sector lead on asset-backed securities and commercial mortgage-backed securities. He is supported by the same trio of comanagers that backed Bill Martin: government specialist John Cerra, high-yield leader Kevin Lorenz, and emerging-markets expert Anupam Damani. They are backed by a robust investment team that continues to expand following the legacy Nuveen and Symphony merger. The organization now boasts considerable firepower, with 43 portfolio managers and 60 analysts spread across the fixed-income platform. Even though Higgins has the ultimate decision-making power for this strategy, he draws on the strength and expertise of the sector managers in allocating capital to portfolios per mandate requirements. As such, the whole team provides input to help with portfolio construction, and often the managers’ portfolios will rhyme with each other. Additionally, the introduction of an investment committee and strategy groups provided more formalized structures for manager discussions and viewpoint sharing.
Performance:
The strategy under Joe Higgins’ tenure has bested almost 70% of distinct peers in the intermediate core-plus bond category, keeping up with the record his predecessor Bill Martin set during his tenure from September 2011 to December 2020. Over that period, the Institutional share class returned 4.5% annualized and outpaced roughly two thirds of peers. While lagging performance punctuated this record at various points, most notably in March 2020, by and large “measured consistency” was the characteristic on display for this strategy’s performance. Following the rough showing in early 2020 when the strategy lost 8%, almost 200 basis points more than the peer group median, the strategy experienced more bumps all throughout 2021 as rate volatility had a negative impact on mortgage holdings. On the plus side, the strategy had an underweighting in agency mortgages relative to the benchmark (18.6% versus 27.4% at year-end) so the hit was less severe, and an overweighting in high-yield corporates relative to the bogy (5.6% versus 0%) proved rewarding given robust economic conditions.
(Source: Morningstar)
Price:
It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s cheapest quintile. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Bronze.
(Source : Morningstar)
About Funds:
TIAA-CREF Core Plus Bond has an experienced lead manager and the solid process remains intact, while the expansive supporting cast has only broadened. The strategy’s Institutional and Advisor share classes earn a Morningstar Analyst Rating of Silver, while the more-expensive share classes are rated Bronze. The W share class, which does not charge a fee, is unrated. Veteran manager Joe Higgins, who has led the sibling strategy TIAA-CREF Core Bond TIBDX since 2011, took over this strategy at the end of 2020 when long time lead manager Bill Martin retired. Higgins was a natural replacement given that he had been running a similar, more-conservative mandate. He is supported by the same trio of comanagers that backed Martin: government specialist John Cerra, high-yield leader Kevin Lorenz, and emerging-markets expert Anupam Damani. All told, Nuveen’s robust taxable fixed-income group boasts more than 100 portfolio managers, analysts, and traders that help Higgins fulfil his mandate. The strategy’s solid process remains unchanged and peppered with measured risk-taking. Higgins and team execute a relative value process that incorporates a broad opportunity set, with the bulk of assets in investment-grade securities and a smaller subset in higher-risk “plus” sectors like high-yield bonds, bank loans, and emerging-markets debt that will typically amount to 10%-30% of assets depending on Higgins’ outlook and allocation decisions.
(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:
- MP1 is a global Software Defined Network provider, focusing on cloud connectivity. As such, the Company is leveraged to the rapid growth of global cloud and data centres and is in a strong position to benefit from the rollout to new cloud and data centre regions. Key macro tailwinds behind MP1’s sector: (1) adoption of cloud by new enterprises; (2) increased level of investment and expenditure by existing customers; and (3) more and more enterprises looking to use multiple cloud products/providers, which works well with MP1’s business model.
- MP1 has a scale advantage over competitors. MP1 has over 600 locations around the globe. MP1 has significant scale advantage over competitors and whilst replicating this scale is not necessarily the difficult task, it will take several years to do so during which time MP1 will continue to add locations and customers using the scale advantage.
- Strong R&D program ensuring MP1 remains ahead of competitors.
- Strong cash balance of $104.6m.
- Strong relationship with data centres (DC). MP1 has equipment installed in 400 data centres, so MP1 is a customer of data centres. MP1 also drives DCs interconnection revenue. Whilst several data centres like NEXTDC, Equinix provide SDN (Software Defined Network) services, it is unlikely data centres will look to change their relationship with (or restrict) MP1 given they are designed to be neutral providers to network operators. Further, given MP1’s existing customer base and connections with cloud service providers, it would be very difficult for data centres (without significant disruption to customers/cloud service providers) to change the rules for MP1.
Key Risks:
- High level of execution risk (especially with respect to development).
- Revenue, cost and product synergies fail to eventuate from the InnovoEdge acquisition.
- Heavy reliance on third party partners (especially data centre providers and cloud service providers).
- Data centres like NEXTDC, Equinix provide SDN services and decide to restrict MP1 in providing their services.
- Disappointing growth (in terms of expanding data centre footprint, customers, ports, Megaport Cloud Router).
Key highlights:
(1) Revenue increased +42% over pcp to $51.2m, driven by increased usage of services across all regions, with North America delivering strongest growth across all regions, increasing +55% over pcp, followed by Europe (+35% over pcp) and Asia Pacific (+28% over pcp). Monthly recurring revenue (MRR) increased +46% over pcp to $9.2m, driven by strong customer growth compounded with a 5% increase over pcp in services per customer.
(2) Profit after direct costs improved +69.4% over pcp to $30.9m, driven by revenue growth and a controlled network cost.
(3) Opex increased +42% over pcp with employee costs increasing +40% over pcp amid investment in headcount to support business growth (employee costs as a percentage of revenue declined -100bps over pcp to 55%), marketing (+126% over pcp) and travel (+1481% over pcp) costs increasing amid a gradual return of travel and conference activities following global easing of Covid-19 restrictions, and IT costs increasing +106% over pcp due to expensing of Software as a Service (SaaS) costs, previously capitalised, following a change in accounting policy.
(4) The Company achieved 2,455 customers (up +7.4% over 2H21) across 768 Enabled Data Centres (420 located in North America, 208 in EMEA and 140 in Asia Pacific).
(5) The Company ended the half with cash and equivalents position of $104.6m, down -23.2% over 2H21.
Company Description:
Megaport Ltd (MP1) is a software-based elastic connectivity provider – that is, it is a global Network as a Service (NaaS) provider. MP1 develops an elastic connectivity platform providing customers interconnectivity and flexibility between other networks and cloud providers connected to the platform.
(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:
As demand for PCR testing surged during the omicron wave, higher positivity rates limited the ability of pathology providers to pool tests, causing significant delays and accelerating adoption of rapid antigen tests. While Healius is improving its turnaround times, management admitted that the sector wouldn’t be able to keep up again if a similar surge were to occur. Despite bolt-on acquisitions, revenue of AUD 200 million was flat on the prior corresponding period. This was largely driven by pandemic impacts including elective surgery restrictions and fewer medical centre referrals. Healius continues to increase its exposure to higher-margin modalities, and the company remains on track with its costout initiatives such as digitisation and network optimisation.
Despite Virtus deciding not to proceed with the acquisition of Adora, Healius is still classifying the business as a discontinued operation and suggested a sale to a different party is imminent.
Financial Strength:
Healius’ interim 2022 underlying EBIT rose 177% to AUD 376 million driven by operating leverage from elevated PCR testing. Healius declared a fully franked interim dividend of AUD 0.10 per share. Net debt/EBITDA was 0.4 at half-end, but it is expected that gearing to slightly increase following its Agilex acquisition. Segment EBIT margin also contracted roughly 200 basis points sequentially to a depressed 6% on higher locum staff costs due to radiologist shortages.
The smaller imaging segment, which contributed just 3% of group underlying EBIT, was weaker than expected. Despite bolt-on acquisitions, revenue of AUD 200 million was flat on the prior corresponding period. This was largely driven by pandemic impacts including elective surgery restrictions and fewer medical centre referrals. Segment EBIT margin also contracted roughly 200 basis points sequentially to a depressed 6% on higher locum staff costs due to radiologist shortages. This was despite support labour, excluding radiologists, reducing 4% on average per site.
Company Profile:
Healius is Australia’s second-largest pathology provider and third-largest diagnostic imaging provider. Pathology and imaging revenue is almost entirely earned via the public health Medicare system. Healius typically earns approximately 70% of revenue from pathology, 25% from diagnostic imaging and a small remainder from day hospitals.
(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.