As a producer of commodities, Origin is a price-taker and has few competitive advantages over peers. Capital and efficient scale are potential barriers to competition, but they’re not strong enough to justify an economic moat.
Origin’s domestic energy retailing business grew quickly during the past decade, but strong acquisition-driven growth is unlikely to reoccur, with earnings growth largely dependent on Australia Pacific LNG. Acquisitions of government-owned energy assets were previously a key growth driver, but all state-owned retailers are now privatised. Origin, Energy Australia, and AGL Energy collectively control 80% of the market, and the Australian market regulator is unlikely to allow further consolidation among the majors. Future growth depends on energy demand growth, which is likely to remain modest. Domestic energy retailing is Origin’s core business and the cash cow that funds growth projects. Its relatively low-risk attributes are in stark contrast to APLNG.
Financial Strength:
The fair value estimate of AUD 6.50 per share implies a P/E of 19 times for fiscal 2022, and an enterprise value/EBITDA of 7.5 times, including Origin’s share of APLNG earnings.
Origin is in sound financial health following the APLNG selldown, which netted AUD 2 billion in proceeds. Net debt/EBITDA (including cash distributions from APLNG) was 2.9 times in June 2021, at the top of management’s target range of 2.0-3.0 times. Credit metrics were likely to deteriorate further given the formidable earnings headwinds in the utility business, but the APLNG selldown has strengthened the balance sheet and alleviated the risk of an equity raising. Earnings from the energy retailing business are falling because of weak wholesale electricity prices but are likely to recover from fiscal 2023. Strong oil and LNG prices and a conservative dividend policy should help credit metrics further improve.
Bulls Say:
- The Australia Pacific LNG project is the largest coal seam gas to LNG project in Australia and could significantly increase earnings if oil prices strengthen.
- Origin’s energy retail business is the market leader and should benefit from cost-saving initiatives.
- Origin’s cash flow base is diversified, and the company is less susceptible to the vagaries of the market than a non-integrated energy provider.
Company Profile:
Origin Energy is a major vertically integrated Australian energy utility. Its energy retailing business is the largest in Australia, with about 4 million customers and a 33% market share. Its portfolio of base-load, intermediate, and peaking electricity plants is one of the largest in the national electricity market, with a capacity of 6,000 megawatts. Origin also operates and owns 37.5% of Australia Pacific LNG, which owns large coal seam gas fields and LNG export facilities in Queensland.
(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.
Concessions grant the right to operate the roads and collect tolls for predetermined amounts of time. The roads benefit from strong competitive advantages, and the assets generate attractive returns on initial investment, warranting a wide economic moat rating.
Operating cash flow should increase strongly during concession lives, as solid revenue growth, driven by rising tolls and traffic volumes, is leveraged over a mostly fixed cost base. Cash flow stops when concessions end. Concessions on the Australian roads are set to end between 2026 and 2065. Including the long-life U.S. assets, the weighted average is 30 years. To extend its existence, Transurban will look to build new roads or undertake road upgrades which may require new equity issues or increased financial leverage, given that the firm currently pays out all free cash flow as distributions to investors.
Typically, cash flow is defensive and grows strongly, but returns are lower than they appear at first blush, given that the roads are handed over to the government for no consideration when concessions end.
Lockdowns Causes Transurban’s Traffic Volumes To Slump in Key Markets
Sydney and Melbourne–51% and 25% of fiscal 2021 revenue, respectively–have suffered through prolonged lockdowns to slow the spread of the delta variant while rolling out vaccinations. September quarter traffic volumes in Sydney and Melbourne were down 43% and 46% in the same quarter in 2019, prior to the COVID-19 outbreak. Lockdowns are ending and traffic volumes are now recovering, with Sydney leading the way. A rapid recovery is expected consistent with the experience in other markets as they exit lockdowns.
Financial Strength
Transurban is in sound financial health after selling 50% of U.S. assets. As of June 2021, Transurban had a proportional gearing ratio (defined as debt/enterprise value) of 34.3%, a corporate senior debt interest cover ratio of 2.8 times and funds from operations/debt of 8.9%. While financial leverage is high compared with other infrastructure firms, it should quickly improve on strong earnings growth. There is also comfort from relatively defensive revenue and immaterial maintenance capital expenditure requirements. Almost all debt is hedged, and the average maturity (which is currently 7.7 years) has been lengthening. Typically, debt associated with each road is repaid progressively during the last 10 years of concession lives.
Bull Says
- Core Australian roads generate defensive revenue that grows with traffic volumes and toll price increases, which are at a minimum pegged to inflation. Solid revenue growth and a high fixed-cost base translate to strong cash flow and distribution growth.
- Transurban owns high-quality infrastructure assets with limited regulatory risk.
- There are attractive organic growth opportunities, such as potential widening of roads.
Company Profile
Transurban Group is an owner/operator of toll roads in Melbourne, Sydney, and Brisbane. It also owns toll roads in Virginia, USA and Montreal, Canada. The weighted average concession life across the portfolio is close to 30 years. Australian assets contribute around 90% of proportional revenue
(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.
Over the years, there has been a demand for faster, smaller, and more-efficient chips to keep pace with the rapid evolution of modern technology. Many companies are also placing increasing importance on chip customization as a point of differentiation. These trends have provided a boon for Cadence, as the firm’s tools are essential for designers needing to keep pace with growing demands. Such developments in chip design will benefit narrow-moat Cadence and support healthy long-term growth.
There are additional secular tailwinds in the industry buoying Cadence and other EDA vendors. Technologies such as cloud computing, 5G, Internet of Things, AI, and autonomous vehicles will support demand for new, more advanced chip designs. This is reflected in the advent of systems companies such as Tesla designing more chips in-house, thus expanding Cadence’s customer base beyond traditional semiconductor designers. As a result, we expect higher demand for Cadence’s EDA and IP offerings.
Cadence has been a pioneer in the cloud EDA space and has made significant investments in developing its cloud offerings, ranging from hosted cloud to hybrid cloud. While the pace of cloud adoption in the EDA space has been slow, it offers customers a broad range of options with regard to tool deployment. This service also poses a point of differentiation for Cadence relative to chief competitor Synopsys.
Cadence’s moat is supported by strong user metrics. Per company insiders, Cadence has relationships with approximately 100% of chip design companies in the U.S. today, that is if a company is involved in the chip design process, it uses Cadence tools at some stage of its design process. Furthermore, churn is negligible, with customer retention consistently at approximately 100%, showcasing the stickiness of Cadence’s offerings.
Financial Strength
Cadence is in a very healthy financial position. As of April 2021, Cadence had $743 million in cash and cash equivalents versus $347 million in long-term debt due in fiscal 2024.Approximately 85%-90% of the firm’s revenues are of a recurring nature, given that the firm primarily sells time-based licenses.Cadence is profitable on both a GAAP and non-GAAP basis and demonstrates strong cash flows; free cash flow margin has averaged 25% over the last five fiscal years. A healthy growth in free cash flow is expected as industry tailwinds lead to long-term growth for Cadence. On a non-GAAP basis, Cadence has exhibited an operating margin of approximately 30% over the last five fiscal years. Expected this to continue to expand and believe the company will hit 38% non-GAAP operating margins by the end of our explicit forecast period. In the long term, Cadence will be able to exhibit healthy free cash flows while continuing to support both organic and inorganic investments.
Bull Says
- Cadence enjoys a leadership position in the EDA space that has helped the firm develop strong relationships with chip designers, enhancing switching costs. This is reflected in retention rates of approximately 100%.
- Secular tailwinds in chip design such as 5G, Internet of Things, AI/ML, and others should increase demand for EDA tools and support growth for Cadence.
- Cadence Cloud can support a growing total addressable market as systems companies and small/ medium enterprises may take advantage of more flexible and cost-effective chip design capabilities
Company Profile
Cadence Design Systems was founded in 1988 after the merger of ECAD and SDA Systems. Cadence is known as an electronic design automation, or EDA, firm that specializes in developing software, hardware, and intellectual property that automates the design and verification of integrated circuits or larger chip systems. Historically, semiconductor firms have relied on the firm’s tools, but there has been a shift toward other nontraditional “systems” users given the development of the Internet of Things, artificial intelligence, autonomous vehicles, and cloud computing. Cadence is headquartered in Silicon Valley, has approximately 8,100 employees worldwide, and was added to the S&P 500 in late 2017.
(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.
In addition to luxury autos, the company competes in the midsize car and crossover SUV market with its platform that is used for Model 3 and Model Y vehicles. Tesla also plans to sell multiple new vehicles over the next several years. These include a platform that will be used to make an affordable sedan and SUV, a light truck, a semi truck, and a sports car. Tesla also sells solar panels and batteries used for energy storage to consumers and utilities. As the solar generation and battery storage market expands, Tesla is well positioned to grow.
Financial Strength
Rental Car company Hertz announced plans to purchase 100,000 Tesla Model 3 vehicles by the end of 2022. While rental car companies typically get a discount for purchasing vehicles, it is expected that Tesla offered no discount to Hertz, given the company’s growing vehicle backlog. Tesla raised fair value estimate to $680 per share from $650. Our narrow moat rating is unchanged. The market responded positively to the news, sending Tesla shares up 12% at the time of writing. At that point, for consumers who are interested in electric vehicles but hesitant to buy one, renting an EV is an opportunity for an extended test drive to alleviate road trip anxiety. This drives our above-consensus forecast for 30% EV adoption by 2030.
Tesla is in solid financial health as cash and cash equivalents exceeded total debt as of Sept. 30. Total debt was roughly $8.2 billion; however, total debt excluding vehicle and energy product financing (nonrecourse debt) was around $2.1 billion. Cash and cash equivalents stood at $16.1 billion as of Sept. 30.To fund its growth plans, Tesla has used credit lines, convertible debt financing, and equity offerings to raise capital. In 2020, the company raised $12.3 billion in three equity issuances. Management has stated a preference to pay down all debt over time and continues to make progress on this goal. Regardless, with positive free cash flow generation and a clean balance sheet, Tesla could maintain its current levels.
Bulls Say’s
- Tesla has the potential to disrupt the automotive and power generation industries with its technology for EVs, AVs, batteries, and solar generation systems.
- Tesla will see higher profit margins as it achieves its plan to reduce battery costs by 56% over the next several years.
- Through the combination of its industry-leading technology and unique supercharger network, Tesla offers the best function of any EV on the market, which should result in its maintaining its market leader status as EV adoption increases.
Company Profile
Founded in 2003 and based in Palo Alto, California, Tesla is a vertically integrated sustainable energy company that also aims to transition the world to electric mobility by making electric vehicles. The company sells solar panels and solar roofs for energy generation plus batteries for stationary storage for residential and commercial properties including utilities. Tesla has multiple vehicles in its fleet, which include luxury and midsize sedans and crossover SUVs. The company also plans to begin selling more affordable sedans and small SUVs, a light truck, a semi truck, and a sports car. Global deliveries in 2020 were roughly 500,000 units.
(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.
with interests in all Australian hydrocarbon provinces, Indonesia, and Papua New Guinea. Santos is now one of Australia’s largest coal seam gas producers and continues to prove additional reserves. It is the country’s largest domestic gas supplier. Santos boasts some of Australia’s largest and highest-quality coal seam gas reserves. East-coast LNG attracts export pricing and indirectly drives domestic prices in the direction of export parity.
Coal seam gas purchases increased reserves, and partial sell-downs generated cash profits, putting Santos on solid ground to improve performance. Group proven and probable, or 2P, reserves doubled to 1,400 mmboe, primarily East Australian coal seam gas. Coal seam gas has grown to represent more than 40% of group 2P reserves, despite partial equity sell-downs.
Financial Strength:
The fair value of Santos Ltd. is 10.20 which is mainly driven by time value of money and near-term energy price strength.
At end-June 2021 Santos had net debt of USD 2.8 billion, gearing (ND/(ND+E)) at 28% and annualised first-half net debt/EBITDA conservative at just 1.2. Santos’ debt covenants have adequate headroom and are not under threat at current oil prices. The weighted average term to maturity is around 5.5 years. Capital efficient development and fast up-front cash flows from Dorado’s oil should combine to ensure Santos’ leverage ratios continue to decline from current levels despite outgoings.
Bulls Say:
- Santos is a beneficiary of continued global economic growth and increased demand for energy. Aside from coal, gas has been the fastest-growing primary energy segment globally. The traded gas segment is expanding faster still.
- Santos is in a strong position, with 0.9 billion barrels of oil equivalent proven and probable reserves, predominantly gas, conveniently located on the doorstep of key Asian markets.
- Gas has about half the carbon intensity of coal, and stands to gain market share in the generation segment and elsewhere as carbon taxes are rolled out.
Company Profile:
Santos was founded in 1954. The company’s name is an acronym for South Australia Northern Territory Oil Search. The first Cooper Basin gas discovery came in 1963, with initial supplies in 1969. Santos became a major enterprise, though over-reliance on the Cooper Basin, along with the Moomba field’s inexorable decline, saw it struggle to maintain relevance in the first decade of the 21st century. However, the stage has been set for a renaissance via conversion of coal seam gas into LNG in Queensland and conventional gas to LNG in PNG.
(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.
