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Wyndham’s Brands Continue to See Industry Leading Travel Recovery in the U.S.

a brand intangible asset and switching cost advantage. This view is supported by the company’s roughly 40% share of all U.S. economy and midscale branded hotels and the industry’s fourth-largest loyalty program by which encourages third-party hotel owners to join the platform. 

With essentially all of its nearly 9,000-plus hotels managed or franchised, Wyndham has an attractive recurring-fee business model with healthy returns on invested capital, as these asset-light relationships have low fixed costs and capital requirements. This asset-light model creates switching costs, given 10- to 20-year contracts that have meaningful cancellation costs for owners.

The 2018 acquisition of La Quinta as a strategically strong fit that supports Wyndham’s intangible-asset-driven narrow moat while enhancing long-term growth Cyclicality, illnesses like COVID-19, and overbuilding are the main risks for shareholders.

Wyndham Continues to Lead the Global Travel Rebound; More Demand Recovery Expected in 2022

Wyndham’s leisure, continued to lead the global travel recovery in the third quarter, with total revenue per available room reaching 98% of 2019 levels. U.S. and international revPAR increased to 107% and 75% of 2019 levels, respectively, up from 95% and 56% in the three months prior. Wyndham expects demand to sustain in the fourth quarter and now sees its 2021 revPAR growth at 43% versus 40% prior and compared with our forecast of 41%. 

Looking to 2022, we expect strong U.S. leisure demand to continue, aided by remote work flexibility, while international markets should experience a strong revPAR recovery because vaccination rates now allow for reduced travel restrictions. This view is supported by Wyndham’s Canadian revPAR improving to 90% of 2019 levels in the quarter, up from around 60%, as the country reduced its pandemic-related restrictions.

Financial Strength

Wyndham’s financial health remains in good shape, despite COVID-19 challenges. Wyndham exited 2020 with debt/adjusted EBITDA of 7.9 times, up from 3.5 times in 2019, as its asset-light business model allows the company to operate with low fixed costs and stable unit growth . But Wyndham did not sit still during the depths of the pandemic; rather, it took action to increase its liquidity profile, tapping its $750 million credit facility (which was repaid in full by Nov. 2020), cutting discretionary expenses, suspending buybacks, and reducing its quarterly dividend from $0.32 to $0.08 (which was increased back to $0.32 per share in Oct. 2021).Further, Wyndham saw positive cash flow generation in 2020, despite COVID-19 significantly reducing global travel demand in that year. While Wyndham’s adjusted EBIT/interest expense was negative 0.4 times in 2020.The company has only $64 million in debt maturing over the next three years. 

Bull Says

  • The La Quinta brand offers long-term growth opportunity to 2,000 units from 937 at the end of 2020, as it is not in 30% of the regions monitored by Smith Travel Research, despite strong third-party hotel operator renewal rates and strong revPAR share in existing market.
  • Wyndham’s economy/midscale select service presence operates at low operating costs, allowing its U.S. hotels to break even at 30% occupancy levels. 
  • The vast majority of Wyndham Hotels’ EBITDA is generated by service-for-fee operations, which are less capital-intensive than owned assets, leading to healthy ROICs.

Company Profile

As of Sept. 30, 2021, Wyndham Hotels & Resorts operates 803,000 rooms across 22 brands in the economy (around 51% of total U.S. rooms) and midscale (45%) segments. Super 8 is the largest brand, representing around 30% of all hotels, with Days Inn (18%) and La Quinta (10%) the next two largest brands. During the past several years, the company has expanded its extended stay/lifestyle brands (2% of total properties), which appeal to travelers seeking to experience the local culture of a given location. The United States represents 61% of total rooms. The company closed its La Quinta acquisition in the second quarter of 2018, adding around 90,000 rooms at the time the deal closed.

(Source: Morningstar)

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Australian Brokers Call – 29 October 2021

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Healius EBIT margin to expand to 13% by fiscal 2026 from 8% in pre-pandemic fiscal 2019

Healius is looking to new sources of strategic growth as well as dealing with prior under investment in infrastructure. There is much to fix in the business and we anticipate it to take a few years before significant margin improvements are made in the base pathology and imaging businesses. Healius selling its medical centers and Adora Fertility to focus on redirecting capital toward infrastructure upgrades and higher-margin Montserrat day hospitals is viewed as a positive strategic step.

Improvement in systems is key to improving efficiency. Pathology is an increasingly technologically driven service and the company intends to invest in a new laboratory information system, automation, and digitization through to fiscal 2024. In addition, the number of tests available is expanding. Increasing complexity of tests, such as veterinary and gene-based testing, is also resulting in average fee price increases. Pathology has a high fixed cost of operation and thus benefits from volume growth to drive lower cost-per-test outcomes.

Financial Strength

After divesting the medical centers and Adora Fertility businesses, Healius boasts significant balance sheet flexibility. While the sale proceeds were used predominantly to retire debt, Healius is also on track to return AUD 200 million to shareholders in the form of share buybacks in calendar 2021. At the end of fiscal 2021, Healius reported AUD 188 million in net debt, representing net debt/EBITDA of 0.7 times pre-AASB 16. Following Healius’ improvement program in the near term, it is expected to free cash flow prior to dividends to settle around 96% of net income at midcycle. The high cash conversion affords Healius to maintain dividend payout ratio of 60%, within Healius’ 50%-70% target range.

Bulls Say’s 

  • On top of the base level of COVID-19 testing that is likely to continue, Healius is well-positioned for underlying trends in preventive diagnostic treatments and outpatient care in its day hospitals. 
  • Simplifying the business via the sale of its medical centers and Adora Fertility is a positive indicator for the ultimate success of the company’s turnaround. 
  • Advances in technology and personalized medicine are increasing the number of complex and gene-based tests available to patients, which are typically higher margin.

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)

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Indian Market Outlook – 29 October 2021

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Japan Market Outlook – 29 October 2021

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Australian Market Outlook – 29 October 2021

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European Market Outlook – 29 October 2021

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CyrusOne Doing Well in Europe and With Hyperscalers, but It Doesn’t Have the Connectivity We Prefer

While the firm has seen major growth in interconnection revenue recently, as more enterprises are co-locating and connecting with their cloud providers, it does not operate any major Internet exchanges, and its properties are less network-dense than top competitors, so we think little differentiates its offering.

CyrusOne believes cloud companies favor outsourcing data centers because they can earn higher returns on capital in their core businesses and data center companies have building efficiency expertise and a cost advantage. CyrusOne is quickly expanding its portfolio to exploit the opportunity. It has nearly 3 times as much undeveloped land as developed and is now expanding outside the U.S. In 2017, it announced an operating partnership with GDS (to gain exposure to the Chinese market) and the acquisition of Zenium (two data centers each in Frankfurt and London). It intends to continue adding in Europe in the near term before focusing more on Asia.

Given the switching costs inherent in the industry and what is effectively CyrusOne’s first-mover advantage in procuring its existing tenants, it is expected that the firm will continue to grow and retain its customers. However, CyrusOne’s strategy to accumulate land and continue building could ultimately prove too aggressive, and it may not be able to fill all its future space on comparable terms, especially given cloud providers’ bargaining power (they have the size and financial ability to keep data centers in-house, and they provide the attraction for CyrusOne’s other tenants). CyrusOne is currently heavily investing, and it will ultimately realize a worthy payoff.

Financial Strength

CyrusOne’s financial position does not seem to be strong, but lack of near-term debt maturities and the ability to issue equity to fund expansion keep this from being a significant near-term concern. CyrusOne is one of the more highly leveraged data center companies we cover–nearly 6 times net debt/EBITDA at the end of 2020–but as a wholesale provider, it has long-term contracts in place with very financially strong tenants, so it should be able to easily meet its obligations, especially with no significant debt maturing before 2024. The firm has taken advantage of low interest rates and its investment-grade credit rating to reduce floating-rate debt to about one third of its total (down from about half at the end of 2019) and bring its weighted average cost of debt down to only about 2% at the end of 2020. CyrusOne has posted negative free cash flow (operating cash flow minus capital expenditures) each year since it went public in 2012, and to remain negative until 2024, as the company continues its aggressive expansion. 

Bulls Say

  • CyrusOne’s rapid expansion and increasing global presence makes it best positioned to capitalize on the huge demand for data centers brought on by cloud usage and a more data-dependent world. 
  • The Internet of Things, artificial intelligence, and other innovations that increase the demand for data and connectivity leave us in the early innings of a data center renaissance. 
  • CyrusOne’s global presence makes it a more attractive landlord for customers that prefer consistent providers worldwide. Only a handful of companies can offer a similar proposition.

Company Profile

CyrusOne owns or operates 53 data centers, primarily in the U.S., that encompass more than 8 million net rentable square feet. It has a few properties in Europe and Asia. CyrusOne has both multi tenant and single-tenant data centers, and it is primarily a wholesale provider, offering large spaces on longer-term leases. The firm has about 1,000 total customers, and cloud service providers and other information technology firms make up about half its total revenue. Its largest customer, Microsoft, accounted for over 20% of 2020 revenue, and its top 10 customers generated about 50%. After cloud providers, companies in the financial services and energy industries contributed the biggest proportions of CyrusOne’s sales.

 (Source: Morningstar)

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Vivo Is Turning the Corner on Growth as Network Investments Bear Fruit

But the market faces several challenges, including stiff competition, a fragmented fixed-line industry, and general economic weakness that has also hurt the value of the Brazilian real. The plan to carve up Oi’s (Brazilian mobile network operator) wireless assets promises to significantly improve the industry’s structure, cutting the number of wireless players to three. Vivo also holds the largest, and fastest growing, fiber network footprint in Brazil, which should allow the firm to stabilize and ultimately grow broadband market share. While results will likely remain volatile, it is expected that Vivo will prosper as Brazilians continue to adopt wireless and fixed-line data services.

Vivo is the largest wireless carrier in Brazil by far, holding 34% of the wireless market, including 38% of the more lucrative postpaid business. The firm generated about 60% more wireless service revenue in 2020 than America Movil or TIM, its closest rivals. The three carriers have agreed to split up the wireless assets of Oi, the distant fourth-place operator that has been in bankruptcy protection. If successful, the transaction could remove a sub-scale player from the industry.

Financial Strength:

The fair value estimated is USD 11.00, which is mainly because revenue growth will average about 5% annually over the next five years.

Vivo’s financial health is excellent, as the firm has rarely taken on material debt. The net debt load increased to BRL 4.4 billion following the acquisition of GVT in 2015, but even this amounted to less than 0.5 times EBITDA. Cash flow has been used to allow leverage to drift lower since then. At the end of 2020, the firm held BRL 3.0 billion more in cash than it has debt outstanding, excluding capitalized operating leases. Even with the capitalized value of operating lease commitments, net debt stands at BRL 7.4, equal to 0.4 times EBITDA. Parent Telefonica has control of Vivo’s capital structure. While Telefonica’s balance sheet has improved markedly in recent years, the firm still carries a sizable debt load and faces growth challenges in its core European operations. The dividend is set to decline another 2% in 2021 based on 2020 earnings. These cuts have come despite ample free cash flow generation.

Bulls Say:

  • Vivo is the largest telecom carrier in Brazil and benefits from scale-based cost advantages in both the wireless and fixed-line markets. 
  • The firm is well-positioned to benefit as consumers demand increased wireless data capacity. Its network in Brazil is first-rate and its reputation for quality is second-to-none. 
  • Owning a high-quality fiber network enables Vivo to offer converged services throughout much of the country, while buttressing its wireless backhaul, improving network speeds and capacity.

Company Profile:

Telefonica Brasil, known as Vivo, is the largest wireless carrier in Brazil with nearly 80 million customers, equal to about 34% market share. The firm is strongest in the postpaid business, where it has 45 million customers, about 38% share of this market. It is the incumbent fixed-line telephone operator in Sao Paulo state and, following the acquisition of GVT, the owner of an extensive fiber network across the country. The firm provides Internet access to 6 million households on this network. Following its parent Telefonica’s footsteps, Vivo is cross-selling fixed-line and wireless services as a converged offering. The firm also sells pay-tv services to its fixed-line customers.

(Source: Morningstar)

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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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Shanghai Market Outlook – 29 October 2021

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