Categories
Funds Funds

Lazard Global Small Cap Fund Updates

Well-resourced team

The Lazard Global Small Cap Fund is managed by an experienced team of 7 Portfolio Managers (most with >20 years industry experience) working as regional generalists led by Edward Rosenfield. The Portfolio Management team has been working together for 13 years on average with the lead PM having worked on the strategy for ~20 years. This makes the team one of the largest, well-credentialed and experienced teams managing FUM in the asset class. Further, the team is supported by the broader Lazard family of analysts (categorized as Global Sector Specialists). This team comprises of more than 100 investment professionals and is considered one of the largest teams. The back and middle office support provided by the wider Lazard group is a positive in our view, as it leaves the PMs to focus on investing rather than other activities.

Disciplined investment process rooted in fundamentals analysis

The Fund uses a rigorous investment process with the Managers employing an active investment style, characterised by incorporating bottom-up investment research, which is underpinned by extensive visitations and meetings with Companies and experts, in assessing fundamentals and valuations of individual securities. In our view, this should lead to the team being able to garner informational advantages and insights over their peers. Indeed, the team’s focus on companies in emerging markets, with capitalisations of between US$300m and US$5bn, or in the range of companies included in the MSCI World Small Cap Accumulation Index, is under researched and a less efficient part of the market (i.e. where mispricing of asset valuations are more prevalent), makes sense in our view.

Solid absolute performance but relative underperformance

Although past performance is not an indicator for future performance, it is an indicator of whether the Fund’s strategy has worked in the past. Although the Fund has performed well on an absolute basis, the Fund has now underperformed relative to its benchmark by ~3.6% p.a. (5 years performance numbers) and a marginal -0.8%, since inception.

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.

Categories
Global stocks

Disney’s Strong Q3 Results, Subscriber Growth at Disney+ Driven by Hotstar

third quarter as revenue and EBITDA came in well ahead of expectations. Disney+ added 12.4 million customers to end the quarter at 116 million subscribers due in part to the return of cricket, still below the 21 million added in the fiscal first quarter but well ahead the 8 million in the second quarter.

The FVE is raised to $170 from $154 due to the lower-than expected streaming losses and stronger subscriber growth. Revenue for quarter has increased by 45% over years to $17 billion. While the ongoing pandemic creates near-term uncertainty, relatively strong consumer demand and the continued growth in bookings remain encouraging signs for a return to long-term growth.

Revenue for the media and entertainment distribution division improved by 18% to $12.7 billion as the growth at direct-to-consumer services and linear networks more than offset the continued declines at the content sales/licensing segment.

Financial Strengths

Revenue for the media and entertainment distribution division improved by 18% to $12.7 billion as the growth at direct-to-consumer services and linear networks more than offset the continued declines at the content sales/licensing segment. Revenue at the DTC segment jumped up by 57% to $4.3 billion. Disney+ ended the quarter with 116 million paid subscribers, up from 103.6 million at the end of last quarter. Subscriber growth was driven by additional country launches and continued growth for Disney+ Hotstar. Hotstar subscribers now represent a little fewer than 40% of the Disney+ subscriber base, versus one third last quarter, which implies that most of the new subscribers came from the Asian platform.

Company Profile

The Walt Disney Company (NYSE: DIS) owns the rights to some of the most globally recognized characters, from Mickey Mouse to Luke Skywalker. These characters and others are featured in several Disney theme parks around the world. Disney makes live-action and animated films under studios such as Pixar, Marvel, and Lucasfilms and also operates media networks including ESPN and several TV production studios. Disney recently reorganized into four segments with one new segment: direct-to-consumer and international. The new segment includes the two announced OTT offerings, ESPN+ and the Disney SVOD service. The plan also combines two segments, parks and resorts and consumer products, into one. The media networks group contains the U.S. cable channels and ABC. The studio segment holds the movie production assets.

(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.

Categories
Global stocks Shares

GTA Continues to Deliver For Take-Two; Raising FVE to $200

the larger third-party video game publishers and owns one of the largest most well-known video game franchises in Grand Theft Auto (GTA). The firm is well positioned not only to capitalize on the success of Grand Theft Auto, but also to continue diversifying its revenue beyond its signature franchise. It is expected Take-Two to continue to benefit from the high demand for consoles, the ongoing revitalization of PC gaming, and the growth of mobile gaming.

Take-Two generally focuses on the higher end, using both its capital to fund the higher-budget blockbusters and its marketing advantage over independents in terms of both budget and established networks to support its titles. The new fair value estimate of $200 per share implies a fiscal 2022 price/earnings of 42, enterprise value/adjusted EBITDA multiple of approximately 27, and free cash flow yield of approximately 3%.

Take-Two introduced a separate multiplayer mode, GTA Online, with the launch of GTA V in 2013. The mode has helped this installment sell over 145 million units by expanding its life cycle and monetization. As a result, GTA V will be launched onto its third generation of consoles in November 2021, likely pushing the potential launch of GTA VI even further out.

Financial Strength

Take-Two is in very good financial health. As of March 2020, Take-Two had over $1.3 billion of cash on hand and carried approximately no debt, a conservative capital structure for a company that generated over $540 million in free cash flow in fiscal 2020. The more consistent free cash flow generation is due in part to management’s efforts to diversify and expand its release slate as well as “GTA Online” expanding the lifecycle and monetization of “Grand Theft Auto V” with free DLC and micro transactions. It is expected that the firm will continue to reinvest its cash into developing new franchises and into R&D for video game engines and video game specific technologies. We also project that the firm will continue to make acquisitions, specifically within mobile and PC game development. 

Bull Says

  • Take-Two has established newer large franchises, such as “Borderlands,” while revitalizing older ones, such as “Xcom.”
  • “Grand Theft Auto” is one of the largest and best known video game franchises, with more than 345 million units sold over its life.
  • The introduction of “GTA Online” in “Grand Theft Auto V” enabled the firm to monetize the game beyond the initial sale.

Company Profile

Found in 1993, Take-Two Interactive Software Inc (NASDAQ: TTWO) consists of two wholly owned labels, Rockstar Games and 2K. The firm is one of the world’s largest independent video game publishers on consoles, PCs, smart phones, and tablets. Take-Two’s franchise portfolio is headlined by “Grand Theft Auto” (GTA) (345 million units sold) and contains other well-known titles such as “NBA 2K,” “Civilization,” “Borderlands,” “Bios hock,” and “Xcom.”

 (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.

Categories
Funds Funds

Perpetual Pure Equity Alpha Fund Updates

Highly rated PM backed by a strong team

The Portfolio Manager of the Fund, Mr. Paul Skamvougeras has extensive experience and track record as an analyst and fund manager, with 25 years industry experience and 15 years with Perpetual. Further, Mr. Skamvougeras is well supported by Mr. Anthony Aboud and the wider Perpetual team of analysts and PMs. Whilst we think highly of Mr. Skamvougeras, we are concerned about his ever-increasing responsibilities (as he is also PM of the Concentrated Equity, Pure Equity Alpha and Pure Value strategies, and Head of Research) and the time he has available for the Fund. Likewise, in our view, Mr. Aboud has significant other responsibilities as he is also PM of Perpetual’s other funds (Industrial Shares, SHARE-PLUS Long-Short) and is also an analyst.

Solid investment process backed by bottom-up research

The investment process is a bottom-up selection approach focused on quality and valuation for both long and short positions. In our view, the Fund is able to take advantage of rising and falling markets and provides useful protection for investors against falling markets.

A note on fees and benchmark

In our view, investors should be comfortable with the Fund’s fees, which are higher than its wider peer group. Furthermore, in our view, we note that the Fund’s performance is measured against the RBA cash rate (which is currently a low hurdle in our view); and in our view, a ‘more appropriate’ benchmark would be an equity benchmark, such as the ASX200 or ASX300, especially when charging performance fees.

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.

Categories
Property

Charter Hall Social Infrastructure REIT Updates

Minature houses resting on pound coin stacks concept for property ladder, mortgage and real estate investment
  • Majority of leases are triple-net leases.
  • CQE is a play on (1) population growth; (2) increasing awareness of early childhood education; (3) increasing number of families with both parents working and hence demand for childcare services. CQE has increased its portfolio weighting towards social infrastructure assets.
  • CQE’s tenants possess strong financials 
  • Strong history of delivering continuing shareholder return and dividends.
  • Solid balance sheet position.
  • Strong tailwinds for childcare assets and social infrastructure assets.

Key Risks

We see the following key risks to our investment thesis:

  • Regulatory risks.
  • Deteriorating property fundamentals.
  • Concentrated tenancy risk, especially around Goodstart Early Learning.
  • Sentiment towards REITs as bond proxy stocks impacted by expected cash rate hikes.
  • Broader reintroduction of stringent lockdowns across Australia due to Covid-19.

Property Portfolio Highlights

During FY21, CQE increased its portfolio weighting to social infrastructure assets, diversifying from a pure childcare focus. Key highlights (relative to FY20): 

(1) CQE saw revaluation uplift of $119.4m, up +11.1% net of capex and on a passing yield of 5.6%. 

(2) Portfolio WALE of 15.2 years, increased from 12.7 years. The portfolio was 100% occupied and lease expiries within the next five years are at 3.4% of rental income. 

(3) The majority of leases (73.2%) are now on fixed rent reviews up from 53.6% at FY20, resulting in a forecast WARR of 2.9%. 

(4) Social Infrastructure Acquisitions: CQE acquired 

  • Mater Health corporate headquarters and training facilities for $122.5m (passing yield of 4.84%, underpinned by a new 10-year lease to Mater and fixed annual rental increases of 3.0%). Mater, Queensland’s largest Catholic, not-for-profit health provider, with net assets of over $1bn; and 
  • South Australian Emergency Services Command Centre and adjacent car park (in construction), for $80m (passing yield of 4.8%). On completion, the asset will be leased to the South Australian Government (85% of property’s total income) and occupied by four Government emergency services agencies on a 15-year lease, with fixed 2.5% annual rent escalations and two 5-year options.

 (5) Childcare Portfolio: CQE acquired three new childcare properties for $12.6m (purchase yield of 6.4%; all leased to ASX-listed tenants on average lease expiries of 20 years). CQE divested “non-core assets to recycle capital into properties with more favourable property fundamentals to improve the quality of the portfolio”; divesting 44 properties for $85.3m (including remaining 20 NZ assets), on average yield of 5.9% resulting in a 5.7% premium to book value. These divestments encompass smaller centres (average of 67 places), short WALE (average 6.6 years) and lower socio-economic locations. CQE also completed ten developments with $69.7m completion value and a yield on cost of 6.1%. CQE’s childcare development pipeline: 14 projects, of which 9 are expected to be completed during FY22.

Company Description  

Charter Hall Social Infrastructure REIT (formerly Charterhall Education Trust) (ASX: CQE) is an ASX listed Real Estate Investment Trust (REIT). It is the largest Australian property trust investing in early learning properties within Australia and New Zealand but recently widen its mandate to also invests in social infrastructure properties.

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.

Categories
Global stocks Shares

Shares of Pilgrim’s Go Hog Wild on Takeout Proposal from JBS but Still Offers Upside

 José Batista Sobrinho (JBS) seeks to simplify its corporate structure by delisting Pilgrim’s as a public company, allowing for a reduction in administrative expenses and an increase in operational flexibility. The proposal equates to an $8.4 billion enterprise value, 6.3 times our 2022 EBITDA estimate and 6.5 times. However, it is a light offer, particularly when compared against the 9.1 times Sanderson Farms agreed to be purchased earlier this week by Cargill and Continental Grain Company. 

Shares of Pilgrim’s popped more than 20% on the news to above $27, suggesting investors also think there could be upside to the offering. The proposal now stands to be reviewed by a special committee of Pilgrim’s board of directors and, if approved, would need to be supported by a majority of Pilgrim’s shareholders excluding JBS, which should take several months to conclude.

There are three potential outcomes, 1) Pilgrim’s board could negotiate a higher price (we see this as the most likely scenario as our $32 intrinsic value suggests 17% upside), 2) the $26.50 deal could be accepted (causing the stock to move 3% lower), or 3) a deal cannot be reached, putting the stock at risk of gravitating towards its pre-offer price of $22.68 (17% lower). 

Although shares of Pilgrim still trade at a mid-teens discount to our fair value estimate, we also continue to view no-moat Conagra and wide-moat Kellogg as attractive investment options, trading 20% below our assessments of intrinsic value.

Company Profile 

Pilgrim’s Pride Corp (NASDAQ: PPC) is the second-largest poultry producer in the U.S. (62% of 2020 sales), Europe (27%), and Mexico (11%). The 2019 purchase of Tulip, the U.K.’s largest hog producer, marks the firm’s entrance into the pork market, which represented 11% of 2020 sales. Pilgrim’s sells its protein to chain restaurants, food processors, and retail chains under brand names Pilgrim’s, Country Pride, Gold’n Plump, and Just Bare. Channel exposure is split evenly between retail and food service, with the majority of food-service revenue coming from quick-service restaurants. JBS owns 80% of Pilgrim’s outstanding shares.

 (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.

Categories
Global stocks

GEA’s Full Q2 Results Reinforce Margin Recovery Story

indicated a continued margin recovery including gross margin expansion. It maintains EUR 35.00 fair value estimate and wide moat rating. Orders and revenue grew organically by 30.00% and 3.00%, respectively. The strong order growth relative to order execution within the quarter, led to a book/bill well above 1.00 times at 1.12, showing solid demand momentum. 

Demand also compared favorably with pre coronavirus levels; first-half 2021 orders were up by 10.00% over first half 2019. EBITDA before restructuring growth of 9.00% outpaced revenue growth due to margin expansion. EBITDA before restructuring margin expanded by 120 basis points to 13.30% year over year. Encouragingly, gross margins improved across all the divisions. However, the largest contributor to earnings growth was the company’s moaty separation and flow technology division. 

The products in this division include separators and centrifuges, where we believe GEA Group, Alfa Laval and SPX Flow dominate the premium market. The division’s EBITDA margin, which is above group level, expanded to 23.80% from 20.40% in the second quarter, boosted by better gross margins on new equipment sales.

Company Profile

GEA Group AG (ETR: G1A) is an expert in food processing. It manufactures equipment for separation, fluid handling, dairy processing, and dairy farming, and designs and constructs process lines or entire plants for customers. Based in Germany, the company is a global market leader, with number-one or number-two positions in its markets. Its separators are used in hundreds of different, tailored applications. Every fourth liter of milk, third instant coffee line, third chicken nugget, and second litre of beer globally is processed using the company’s specialized equipment.

 (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.

Categories
Technology Stocks

DoorDash Reported Strong Q2 Growth; Network Effect Remains Intact, but Shares Remain Overvalued

The firm is at the early stages in trying to attract a larger piece of what we estimate could be $1 trillion worth of goods and services by 2025 to its platform. DoorDash benefits from the network effects between merchants, deliverers (or “dashers”), and consumers, plus intangible assets, in the form of data, which we believe together warrant our narrow moat rating. Consumers use DoorDash’s app to order food for pickup or delivery from restaurants. Based on data from Second Measure, DoorDash currently is the market leader in the U.S., with 56% share, above Uber’s 26% and Grubhub’s 18%. The firm has over 450,000 merchants, more than 20 million consumers, and more than 1 million dashers on its platform.

DoorDash has also begun to provide similar service to businesses in verticals other than restaurants, such as grocery, retail, pet supplies, and flowers. With strengthening of the network effect, we expect DoorDash to maintain its leadership position in likely a market where there will be only one other viable player, Uber Eats, in the long run. The firm’s network effect should also lower consumer and deliverer acquisition costs, resulting in further operating leverage and GAAP profitability in 2023. 

Financial Strength 

Our $142 fair value estimate of narrow moat DoorDash and continue to view the very high uncertainty rated stock as overvalued. The firm reported mixed second-quarter results with revenue beating the FactSet consensus estimates, while losses were a bit more than expected. While DoorDash and Uber will hold the number one and the number two positions in delivery within the U.S., DoorDash’s stock price may be displaying too much optimism about how quickly and at what cost the firm can diversify its business within and outside of the U.S. market. At current levels, we prefer Uber, as our $69 fair value estimate on the stock represents a 61% potential upside. 

DoorDash’s gross order volume increased 70% year over year and 5% from the first quarter to $10.5 billion. Such growth was driven by an increase in the number of orders (69% year over year) and gross order volume per order (up 1%). The higher take rate resulted in $1.2 billion in total revenue, up 83% from last year. The firm generated a GAAP operating loss of $99 million during the quarter compared with $27 million in operating income in the second quarter of 2020. During the second quarter, sales and marketing as a percentage of revenue spiked to 35% (from 25% last year but slightly more comparable to last quarter’s 31%) mainly due to more aggressive marketing to consumers and drivers.

DoorDash went public in late December 2020, raising $3.3 billion to fund its operations as it continues to invest in growth. The firm likely will not become profitable until 2023. DoorDash holds $4.5 billion in cash and cash equivalents and no debt. The firm has access to a $400 million revolving credit facility from which nothing has been drawn.DoorDash burned $159 million and $467 million in cash from operations in 2018 and 2019, respectively, and generated $252 million in cash from operations in 2020 due to a smaller net loss and higher non-cash expenses, especially a significant year-over-year increase in stock-based compensation to $322 million from $18 million. The firm averaged $66 million, or nearly 6% of revenue, in capital expenditures in 2018-20.

Company Profile 

Founded in 2013 and headquartered in San Francisco, DoorDash is an online food order demand aggregator. Consumers can use its app to order food on-demand for pickup or delivery from merchants mainly in the U.S. The firm provides a marketplace for the merchants to create a presence online, market their offerings, and meet demand by making the offerings available for pickup or delivery. The firm provides similar service to businesses in addition to restaurants, such as grocery, retail, pet supplies, and flowers. At the end of 2020, DoorDash had over 450,000 merchants, 20 million consumers, and over 1 million dashers on its platform. In 2020, the firm generated $24.7 billion in gross order volume (up 207% year over year) and $2.9 billion in revenue (up 226%).

(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.