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Freight Demand To Remain Strong In Near Term, Benefitting Cummins

Post author By lvc-admin
Post date February 10, 2022
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Business Strategy and Outlook

It is viewed 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 growing 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 probable 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 viewed this play out recently, through the increase in partnership announcements for medium-duty engines with truck OEMs. It is seen, 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 alleged 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 is believed 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 seen the company can meet its near-term debt obligations given its strong cash balance. It is also viewed, 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 alleged 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 likely management is determined to improve its distribution business following its transformation efforts in recent years. It is probable 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.

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Stevanto’s Near Term Outlook Foresight Uncertain

Post author By lvc-admin
Post date February 10, 2022
No Comments on Stevanto’s Near Term Outlook Foresight Uncertain

Business Strategy and Outlook

Stevanato is the market leader in pen cartridges and presterilized vials and holds the number position in prefillable syringes (behind Becton Dickinson). The company is a key supplier in the drug delivery supply chain, and provides drug containment and primary packaging solutions to 41 of the top 50 global pharma companies. Primary packaging is the material that first envelops a drug product, and safe production of drug-delivery packaging is critical for the successful delivery of pharmaceutical products.

Stevanato aims to increase the percentage of product sales from high value solutions, which refers to products with proprietary intellectual property and greater complexity, such as presterilized drug containment and integrated self-injector pen and wearable devices. The company is prioritizing investment in research and development and broadening its offering through M&A. Capacity expansion is also a key component of Stevanato’s long-term strategic plan, and capital expenditures are likely to remain elevated over the next year or two. Competition for skilled employees is extreme, and future growth will depend on effectively hiring and retaining talent.

Both the biopharmaceutical and diagnostic segments are expected to benefit from an increased contribution in high value solutions over time, which has been growing 20% year over year and now represents about 23% of consolidated revenue. It is anticipated the ongoing shift to high-value will provide a material tailwind for margin over the next five to 10 years, and also contribute to robust top line growth. It is seen an uncertain near-term outlook for the business, with both positives and negatives related to the ongoing pandemic. Some drug trials have postponed or delayed, leading to lower sales growth for some customers’ drug portfolios. However, this has been mitigated by the pressing need for vaccines and treatments, which has allowed Stevanato to enjoy compound annual top line growth near 25% over the last two years. The company supplies vials and syringes to about 90% of currently approved vaccines.

Financial Strength

Stevanato has a sound financial position.As of September 2021, total cash position in excess of long-term debt on the balance sheet was EUR 154 million. This was mainly related to the firm’s IPO from July 2021, which raised EUR 154 million. In analysts’ view, Stevanato has more than sufficient capital to fund increasing capacity investment, and it can also be seen the potential for tuck-in acquisitions to broaden the firm’s value proposition in the drug delivery supply chain.In the near term, however, Stevanato’s expansion plan is likely to be the focus of capital deployment. Because of a higher level of capital investment, the company reported free cash flow of negative EUR 9.9 million for the third quarter of 2021. It is anticipated significant earnings and cash flow growth over the next few years, and while free cash flow is likely to be close to flat in 2022, it is anticipated free cash flow above EUR 20 million in 2023. It is believed that it’s possible that some additional debt might be needed to cover cash flow needs, but, considering Stevanato’s current low degree of financial leverage, it is not to be concerned with an increase in debt at or below EUR 500 million.

Bulls Say’s

Stevanato has room to bring customers up the value chain to higher-value products and services, giving it a lengthy tailwind for earnings growth and margin expansion.
In contrast to peers, Stevanato can use in-house produced glass vials and syringes for integrated selfinjector systems, reducing the number of vendors for customers and providing Stevanato with a possible cost advantage.
As large economies such as India and China implement more stringent pharmaceutical standards, Stevanato stands to become a key cog in the supply chain in those countries.

Company Profile

Italy-based Stevanato Group is a provider of drug containment, drug delivery and diagnostic solutions to the pharmaceutical, biotechnology and life sciences industries. It delivers an integrated, end-to-end portfolio of products, processes, and services that address customer needs across the entire drug life cycle including development, clinical, and commercial stages. Stevanato’s revenue is geographically diversified, with 60% of sales from Europe, the Middle East and Africa (EMEA), 27% in North America, 10% in Asia-Pacific (APAC), and 3% in South America.

(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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Property

Charter Hall Long WALE REIT (CLW) reports solid earnings up by 5.6%

Post author By lvc-admin
Post date February 10, 2022
No Comments on Charter Hall Long WALE REIT (CLW) reports solid earnings up by 5.6%

Above view of chef engineer in shirt and tie explaining sketch to manual workers in industry

Investment Thesis:

Trading at a discount to NTA and our blended valuation.
Economic conditions appear to be improving ahead of expectations post the Covid-19 related impact – this should be positive for asset revaluations and rents.
Strong history of delivering continuing shareholder return and dividends.
Solid balance sheet position.
Strong property portfolio metrics.
Selective asset acquisitions.
Expiry risk is relatively low in the near-term.
Attractive yield in the current low interest rate environment.

Key Risks:

Regulatory risks.
Deteriorating property fundamentals, including negative rent revisions.
Deterioration in economic fundamentals leading rent deferrals etc.
Sentiment towards REITs as bond proxy stocks impacted by expected cash rate hikes.
Deterioration in funding costs.

Key highlights:

Charter Hall Long WALE REIT (CLW) reported a solid set of 1H22 results reflecting operating earnings of $97.8m, or 15.31cps, up +5.6%, and distributions of 15.24cps, up 5.1% on pcp.
CLW’s portfolio retained strong operating metrics – at period-end, CLW’s portfolio is 99.9% occupied and comprised 549 properties with a long WALE of 12.2 years.
In the half, CLW also completed its acquisition for $814m for a 50% interest in the ALE Property Group, acquired in partnership with Hostplus. The ALE Property Portfolio comprises 78 high quality pub assets, of which 74 bottle stores are in 99% metropolitan locations.
The ALE Property Portfolio comprises 78 high quality pub assets, of which 74 bottle stores are in 99% metropolitan locations.
The stock currently trades at a discount to its net tangible assets, most likely as investors are concerned over the impact of Covid-19 and associated regulatory lockdown measures, and its impact on property valuations.
However, over the longer term, based on the quality of CLW’s management team and property portfolio, and sustainable dividend yield.
CLW’s total property portfolio value increased ~$1.42bn to $6.98bn, driven by $923m of acquisitions and $532m in property revaluation uplift.

Company Description:

Charter Hall Long WALE REIT (ASX: CLW) is an Australian REIT listed on the ASX and investing in high quality Australasian real estate assets (across office, industrial, retail, agri-logistics and telco exchange) that are redominantly leased to corporate and government tenants on long term leases. CLW is managed by Charter Hall Group (ASX: CHC).

(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.

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