Investment Thesis
- Improving sales mix towards higher grade products should continue to narrow the price discount FMG achieves to the market benchmark Platts 62% CFR Index.
- Global stimulus measures – fiscal and monetary policies – are positive for global growth and FMG’s products.
- Capital management initiatives – increasing dividends, potential share buybacks given the strength of the balance sheet.
- Strong cash flow generation.
- Quality management team.
- Continues to be on the lower end of the cost curve relative to peers; with ongoing focus on C1 cost reductions should be supportive of earnings.
Key Risks
- Decline in iron ore prices
- Cost blowouts/ production disruptions.
- Cost out strategy fails to yield results.
- Company fails to deliver on adequate capital management initiatives.
- Potential for regulatory changes.
- Vale SA supply comes back on market sooner than expected.
- Growth projects delayed.
FY21 Results Highlights : Relative to the pcp:
- Underlying EBITDA of US$16.4bn, was up +96% as Underlying EBITDA margin increased to 73% (from 65% in the pcp).
- NPAT of US$10.3bn, was up +117% and represents a return on equity of 66%. EPS was US$3.35 (A$4.48).
- FMG achieved net cashflow from operating activities of US$12.6bn and free cashflow of US$9.0bn after investing US$3.6bn in capex.
- Fully franked final dividend of A$2.11 per share, increasing total dividends declared in FY21 to A$3.58 per share, equating to A$11.0bn and an 80% payout of NPAT.
- FMG had cash on hand of US$6.9bn and net cash of US$2.7bn at year-end. Balance sheet remains strong with 19% gross gearing (below 30 to 40% target). Gross debt to EBITDA of 0.3x, was lower than 0.6x in FY20 and remains below target of 1-2x.
- FMG revised its target to achieve carbon neutrality by 2030 (ten years earlier than previous target).
Operational performance highlights. Relative to pcp:
- Ore mined of 226.9m tonnes, was up +11%.
- FMG shipped a record 182.2m tonnes, up +2%; and sold 181.1mt, up 2%.
- Average revenue of US$135.32/dmt, was up +72%.
- FMG saw C1 cost of US$13.93/wmt, increase +8% but remains industry leading.
Company Profile
Fortescue Metals Group Ltd (FMG) engages in the exploration, development, production, processing, and sale of iron ore in Australia, China, and internationally. It owns and operates the Chichester Hub that consists of the Cloudbreak and Christmas Creek mines located in the Chichester Ranges in the Pilbara, Western Australia; and the Solomon Hub comprising the Firetail and Kings Valley mines located in the Hamersley Ranges in the Pilbara, Western Australia. The Company was founded in 2003 and is based in East Perth, Australia.
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.
Approach
The managers first generate ideas through a quality-growth screen, which includes companies with market caps of at least $3.5 billion, a good liquidity profile, and other metrics such as strong and improving margins. The team excludes non-growth industries such as utilities and looks for companies with solid returns on invested capital. Factors such as economies of scale, intellectual property, and legal or regulatory advantages are key. The team also places a heavy emphasis on culture, believing that culture drives certain companies forward and helps maintain their competitive edge. The team takes its best ideas and builds a relatively concentrated portfolio of roughly 30 to 40 international stocks. Because of their benchmark-agnostic approach, the portfolio may have extreme over- and underweighting to various sectors.
Portfolio
The managers use their best ideas to build a concentrated portfolio. . Coming out of the 2007-09 global financial crisis, the managers felt like their portfolio was too concentrated at about 20 holdings. They’ve gradually increased that count, and in July 2021 had 35 holdings. While still relatively concentrated (the typical foreign large-growth peer held 83 stocks in July), the expansion helps reduce individual stock risk. The managers take other prudent steps to minimize risk and remain relatively diverse. They avoid sectors that they believe offer little growth potential and as of July 2021, the fund had no exposure to energy, real estate, or utilities.
People
Co-CEO and manager Kurt Winrich’s upcoming retirement has been long in the works and the team will still have four capable managers to pick up the slack. Mike Trigg, who has been on the strategy since the fund’s 2011 inception, is the final decision-maker here. . Peter Hunkel, who has also managed since the fund’s inception, is responsible for portfolio construction. The team promoted Sanjay Ayer, also a former Morningstar equity analyst, to the management ranks in June 2019. Ayer joined WCM in 2007 and manages the WCM Global Growth Fund WCMGX and the WCM Emerging Markets Fund WCMEX, which have had success under him. Paul Black, co-CEO of WCM, is a named manager here but serves mainly as an advisor to the team.
Performance
Strong stock selection has fueled the fund’s outperformance. Picks in technology and industrials, in particular, have been among the biggest contributors to its performance. That helped the strategy weather 2020’s first-quarter coronavirus-driven slide. The fund held up slightly better than the index losing 29.4% from Jan. 18 to March 23, 2020, compared with the index’s 30.3% loss. The managers then opportunistically added MercadoLibre MELI and Ferrari RACE, which benefitted the strategy coming out of the bear market. In 2021, the fund has returned to its winning ways. Its 12.7% return handily beat the index’s 4.6% and the Morningstar Category’s 4.5%. That was good for the top decile in the category. Holdings such as ASML Holdings NV ADR ASML and Shopify SHOP were among the leading contributors in that period.
About the Fund
WCM Focused International Growth Fund seeks long term capital appreciation by investing in equity securities of non-U.S. domiciled companies or depository receipts of non-U.S. domiciled companies.
(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:
- In our view, considering the quality of the business, EQIX is trading at fair valuation (from the perspective of trading multiples, dividend yield and our DCF valuation).
- Attractive long-term outlook in global digitization and data requirements of companies, with 5G and cloud computing as key drivers.
- Businesses moving away from on-premise centres towards colocation and cloud networks.
- Diversified client base and revenue stream minimises contractual risk.
- Opportunity for future market share expansion via potential acquisitions.
Key Risks:
- Increases to operating expenses – particularly electricity costs. However, the contracts between Equinix and its customers provide for rights and protection clauses to permit the Company to pass on electricity cost increases that exceed 5%.
- Rising technology and acceptance of cloud-based services may incentivise businesses to fully leverage cloud infrastructure rather than connecting with IBX data centres. However, management has downplayed these concerns, stating that there must still be direct interconnection between Cloud and businesses within the data centres.
- Newer IBX data centres have twice the cooling needs as old centres. Potential power limitations could force the company to have a lower utilization rate of its cabinets.
- Increased competition in the industry from the likes of Google, Apple, Microsoft and Digital Reality Trust, and the possibility of formation of strong strategic alliances amongst competitors
- EQIX is subject to exchange rate risk due to the company’s diverse geographical scale of operations. However, the company hedges many of these exposures.
- REIT classification mandates a minimum of 90% of taxable income paid to shareholders. This may hinder EQIX’s ability to increase its cash via retained earnings and could render the company’s balance sheet inflexible.
Key highlights:
- Over the quarter, revenues up +8% to $1.7bn, adjusted EBITDA up +7% and AFFO was ahead of management’s expectations.
- Strong quarterly result, with revenues up +8% to $1.7bn, adjusted EBITDA up +7% and AFFO growth of +10% (normalised and constant currency) was ahead of management’s expectations.
- Interconnection revenues grew +12%
- On a normalized and constant currency basis, Americas’ revenue growth of +8% YoY was among the highest in as many quarters. Adjusted EBITDA of $326m was up +3%.
- Asia-Pacific reported normalized and constant currency revenue up +11% YoY and normalised MRR up +9% YoY, with management noted MRR growth was partially impacted by Covid related constraints in Singapore and political uncertainty in Hong Kong.
- Total gross debt at the end of the quarter was $11.8bn, with weight average borrowing costs of 1.72% (95% of the debt is at fixed rate) and weight average maturity of debt 9.6 years.
- Net leverage ratio at the end of the period was 3.8x
Company Description:
Equinix (NASDAQ: EQIX) is a leading company in internet connection and data centres. It is the global market leader in colocation data centre industry, providing data services and platforms for over 9800 companies across 24 countries. This allows companies to connect to their online ecosystem and meet their interconnection needs for their business operations. EQIX also offers additional solutions such as the Equinix Cloud Exchange Fabric to connect data centres to cloud networks, and the recently introduced Equinix SmartKey to offer encryption protection for the data security management of companies.
(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.
