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Technology Stocks

BorgWarner’s annualized revenue growth that exceeds global vehicle demand

× We think BorgWarner’s economic moat sources derived from powertrain intellectual property and switching costs are misunderstood. The market, in our view, has valued shares as though revenue declines long term on shrinking demand for internal combustion engines, despite increasing penetration in ICE, exposure to globally popular sport utilities, and electrified powertrain growth potential.

× We forecast annualized revenue growth that exceeds global vehicle demand growth by 2-4 percentage points.

× $2.0-$2.4 billion booked net new business backlog through 2021, implies 5-6% organic CAGR.

× EBITDA margin has had a high, low, and median of 17.2%, 9.7%. and 16.7%, respectively. We assume a 15.0% normalized sustainable midcycle EBITDA margin. Investors would have to believe a 12.4% midcycle EBITDA margin for our model to generate a fair value equivalent to the sell-side consensus price target.

× In our opinion, the market values BorgWarner as though fundamentals are in permanent decline, giving no credit for the company’s economic moat in powertrain technologies and consistent ROIC generation above cost of capital.

Company Profile

BorgWarner Inc. provides solutions for combustion, hybrid, and electric vehicles worldwide. The company’s Engine segment offers turbocharger and turbocharger actuators; eBoosters; and timing systems products, including timing chains, variable cam timing, crankshaft and camshaft sprockets, tensioners, guides and snubbers, front-wheel drive transmission chains, four-wheel drive chains, and hybrid power transmission chains. It also provides emissions systems, such as electric air pumps and exhaust gas recirculation (EGR) modules, EGR coolers and valves, glow plugs, and instant starting systems; thermal systems products comprising viscous fan drives, polymer fans, coolant pumps, cabin heaters, battery heaters, and battery charging; and gasoline ignition technologies.

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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.

Categories
Global stocks

Daimler AG attractive prospects in the automotive industry

× We also believe the market has discounted the stock for higher investment needed in industry disruptive technologies, including mobility services, autonomy, and powertrain electrification, which our fair value already takes into consideration.

× During the past 10 years, Daimler’s EBIT margin has had a high, low, and median of 8.8% (2016), negative 2.9% (2009), and 6.9%. We model Stage I peak EBIT margin at 7.0%, which represents a 180-basis-point contraction from the 10-year high.

× Our margin assumptions decline in the last two years of our Stage I to our normalized sustainable midcycle assumption of 5.9% in year five. Our midcycle assumption represents a 100-basis-point contraction versus Daimler’s 10-year 6.9% historical median.

× Despite our assumptions for significant margin pressure, our DCF model still generates a EUR 85 fair value estimate that represents 63% upside to the EUR 52 consensus price target and 74% upside potential versus the current market valuation.

For over 100 years, Daimler shares have been the investment in the inventors of the automobile. Based on the expected market development and the current assessments of the divisions, Daimler continues to anticipate Group unit sales, revenues and EBIT in 2021 to be significantly above the prior year’s level. The current worldwide supply shortage in certain semiconductor components affected deliveries in the first quarter. Daimler anticipates that this shortage could further impact sales in the second quarter. Although visibility is limited at present, Daimler assumes some recovery in the third and fourth quarter.

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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.

Categories
Shares Technology Stocks

Delphi Technologies largest product group is Fuel injector technology

× Fuel injector technology is currently Delphi’s largest product group. This represents a risk as manufacturers switch to smaller engines with fewer cylinders.

× Even so, the growth potential for Delphi’s electric and electronic powertrain products is substantial and represents margin expansion potential from software-based applications. We think Delphi revenue will grow at 1-3 percentage points above our long-term forecast for global light vehicle demand.

× We assume a 15.5% normalized sustainable midcycle EBITDA margin, 160 basis points below 17.1% historical 10-year high but 50 basis points above the 10-year median owing to more favorable product mix.

× To force our DCF model’s fair value to equal the $22 consensus price target, investors would have to believe a 10.0% midcycle EBITDA margin. To reach the market price, the midcycle EBITDA margin would have to be 8.7%, 80 basis points less than the 10-year historical low.

Delphi Technologies, a spinoff from Delphi Automotive, provides advanced vehicle propulsion solutions through combustion systems, electrification products and software and controls for global automotive, commercial vehicle and aftermarket customers.

DLPH Stock Summary

  • The capital turnover (annual revenue relative to shareholder’s equity) for DLPH is 27.74 — better than 98.99% of US stocks.
  • DLPH’s went public 2.83 years ago; making it older than merely 8.53% of listed US stocks we’re tracking.
  • Equity multiplier, or assets relative to shareholders’ equity, comes in at 14.76 for Delphi Technologies PLC; that’s greater than it is for 97.12% of US stocks.

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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.               

Categories
Dividend Stocks Philosophy Shares Technical Picks

AusNet Services Posts Good result

Reported EBITDA rose 6% to AUD 662 million. Adjusted EBITDA rose 7% to AUD 627 million, tracking slightly ahead of our full-year forecast mainly because of higher-than expected electricity demand. More people working from home benefited volumes and saw the firm earn AUD 21 million above its regulatory cap. This will be returned to customers via lower tariffs mainly in fiscal 2022. As AusNet is regulated, there is no lasting impact on our longer-term earnings forecasts or valuation from demand fluctuations.

Electricity distribution performed well, with revenue up 4% to AUD 502 million and adjusted EBITDA up 11% to AUD 288 million. The strong result benefited from tariff increases and stronger residential demand, but the outlook isn’t as rosy. This asset undergoes a regulatory reset in early 2021, which will likely reduce allowed returns on equity to under 5% for the next five years, from over 7% currently. We forecast average annual revenue growth of just 1% over the next five years, despite ongoing reinvestment and growth in regulated asset base. Gas distribution also benefited from tariff increases and stronger residential demand, helping revenue increase 4% to AUD 149 million and adjusted EBITDA increase 8% to AUD 117 million. The next regulatory reset for the gas network is in early 2023. Overall, we expect revenue to grow at about 3% for the next two fiscal years, before resetting about 5% lower from 2023.

EBITDA in the electricity transmission network rose 1% to AUD 181 million. We forecast revenue grows 1% per year for a couple of years, before falling a few per cent in fiscal 2023 following the next regulatory reset in 2022. The main growth opportunity for AusNet is transmission connections to new wind and solar farms and between states. Some will be unregulated, some regulated. All will be capitalintensive, but we think the firm can fund without an equity raising.

 (Source: Morningstar)

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Dividend Stocks

Avita Therapeutics Inc- outlook

Procedural volumes in the first quarter increased 27% sequentially to 496. As burns treatment is acute and not elective, it cannot be deferred and the reduction in both hospital duration and treatment costs when using RECELL, as opposed to a skin graft, should underpin its use amid a stretched healthcare system. Therefore, while we continue to monitor the resurgence of COVID-19 in the U.S., we think Avita can sustain the estimated first-quarter run-rate of 770 RECELL units and leave our full-year fiscal 2021 unit sales and revenue forecasts of 3,060 and USD 20 million, respectively, unchanged.

The current U.S. approval of the RECELL system is limited to adult burn wounds, however, the applications are far broader. Pivotal clinical trials are underway, and we still anticipate the roll-out of RECELL to be phased to adults outside burn centres in fiscal 2022, paediatric use and vitiligo treatment in fiscal 2023, and soft-tissue reconstruction in fiscal 2025. Key to our valuation is RECELL achieving 45% market share in adults and 20% in children treated at burn centres in the U.S. by fiscal 2025.

Avita is in a healthy financial position and held USD 66 million in cash and no debt as at Sept. 30, 2020. We forecast the company to report a loss of USD 28 million in fiscal 2021, reducing to USD 14 million in fiscal 2022, before positing a USD 5 million profit in fiscal 2023 alongside positive free cash flow.

 (Source: Morningstar)

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Dividend Stocks

Bank of Queensland – Slightly Better on Most Fronts

The AUD 95 million drop in profit was largely attributable to the AUD 101 million rise in loan impairment expenses to AUD 175 million. Statutory profit was only AUD 115 million, reflecting amortisation of intangibles and restructuring. Non-recurring below the-line items have wiped a cumulative AUD 216 million from profit over the past five years, with ongoing investment required to remain competitive against much larger peers understated by cash earnings.

Our AUD 7 fair value estimate is maintained following the result. Fiscal 2020 was a slight beat across the board. Net interest margins of 1.91% were narrowly ahead of our 1.9% forecast, operating expenses increased 7% versus prior guidance and our expectations of 8%, and loan growth of 1.8% to AUD 47 billion was also slightly ahead. While we like the steps being taken by management to improve loan processing times, the digital offering, and ensure no regulatory or compliance breaches; the funding, scale, and capital advantages of large competitors will be difficult to overcome. Over the long term we continue to believe the bank will struggle to achieve above-system loan growth and maintain margins.

Management’s fiscal 2021 outlook for NIM to fall between 2 and 4 basis points, operating costs to be 2% higher, and above-system lending growth, all look reasonable and within our forecasts. We expect profit growth to remain elusive though, due to even higher loan impairments. We assume loan impairments to gross loans of 0.45% and 0.3% over fiscal 2021 and 2022. Bank of Queensland had 12% of its home loan book and 16% of its SME loan book in deferral as at Aug. 31, 2020, and we remain cautious about the outlook as government stimulus is wound back and deferral

periods end.

 (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.

Categories
Global stocks

Fiat Chrysler forecasts long-term average annualized revenue growth

× Management forecasts long-term average annualized revenue growth of 7% and long-term EBIT margin to reach a range of 9% to 11% (five-year plan target to 2022) on the expansion of Jeep, Ram, Alfa Romeo, and Maserati brands. The company’s 2019 forecast includes EBIT of greater than EUR 6.7 billion for a margin of greater than 6.1%. 2019 revenue guidance was not specified, but the EBIT forecast implies at least flat year-over-year revenue.

× Contrast our Stage I forecast and midcycle assumption with management’s five-year plan targets and a 10-year historical annual revenue growth rate of 6% plus adjusted EBIT margin high, low, and median of 6.4%, 2.5%, and 4.3%, respectively.

× Even so, for our model to generate a fair value equivalent to the sell-side consensus and the current market valuation, investors would have to believe midcycle assumptions of 2.5% and 2.1%, below Fiat Chrysler’s 10-year historical range and demonstrating incredulity toward management’s five-year plan targets.

× Including assumptions that are well below management’s five-year plan, our model generates a fair value that represents 99% and 131% upside to the sell-side consensus price target and the current market valuation.

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Dividend Stocks Expert Insights

Bega Cheese- Delivers Robust Earnings

Bega benefited from consumer stockpiling and an associated reduction in promotional activity amid the pandemic. The firm was able to leverage production capacity to meet demand quicke than competitors, achieving market share gains in spreads. However, this was offset by a decline in demand for wholesale food products, bulk ingredients, and disruptions to export market supply chains. Underlying EBITDA margins deteriorated to 6.9% from 7.4% in the prior period, which we attribute to elevated input costs, operating inefficiencies and unfavourable mix shift.

Nonetheless, we expect COVID-19 headwinds to be a shortterm issue for Bega, and the outlook for input cost pricing is improving due to more favourable conditions. We forecast operating margins to expand to 6% by fiscal 2025 (on a post AASB 16 basis) from less than 4% in fiscal 2020, underpinned by process optimisation and cost out initiatives. But we expect further margin expansion to be somewhat limited by Bega’s powerful supermarket customer base, and continued substantial contribution from the dairy category despite the firm’s strategic shift towards becoming a diversified branded consumer packaged food business.

We forecast a revenue CAGR of 6% over the five years to fiscal 2025, underpinned by mid-single-digit growth in the branded foods business, low-single-digit growth in the bulk foods business and inflationary price growth. We forecast per capita cheese consumption to remain stable, implying demand will grow in line with population growth.

Bega’s balance sheet is in sound financial health. Leverage, measured as net debt/underlying EBITDA, improved to 2.35 in fiscal 2020 from 2.75 in fiscal 2019, which is comfortably below covenants. Bega utilised robust operating cash flow and effective working capital management to reduce net debt over the period. We expect leverage to improve to sub-1.0 by fiscal 2025 as earnings improve, working capital unwinds and capital expenditure normalises. We anticipate Bega will have the balance sheet capacity to explore potential bolt-on acquisitions and partake in industry rationalisation, although the timing and scale of further acquisitions is uncertain. Regardless, we expect Bega will maintain a dividend payout ratio of 50% normalised EPS.

 (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.

Categories
Technology Stocks

Tata Motor narrow-moat rating with Jaguar Land Rover group

× We agree with the market’s concerns, including higher JLR debt levels, exposure to the Europe diesel market, the threat of a no-deal Brexit, degradation in JLR margin on industry-disruptive technology spending, and the downturn in China’s as well as India’s vehicle demand, but these issues do not change our long-term view of the firm’s normalized sustainable midcycle potential.

× Excluding joint venture equity income, Tata’s 10-year historical high, low, and median EBIT margin is 10.2% (fiscal 2011), 0.6% (fiscal 2019), and 7.6%.

× We have assumed a normalized sustainable midcycle EBIT margin of 7.5%.

× To force our model to reach the current INR 168 sell-side consensus price target, we would have to believe a 3.5% normalized sustainable midcycle EBIT margin.

× Indicative of the market’s short-term thinking, at the current INR 110 market valuation, the midcycle would have to be 2.9%.

× We think consensus and market valuations treat the stock as though the effects of weak China and India demand, exposure to Europe diesel, a hard Brexit, and margin compression from higher-than-normal spending are permanent impairments to the company’s profit profile.

Tata Motors Limited is an automobile company. The Company is engaged in manufacture of motor vehicles. The Company’s segments include automotive operations and all other operations. The Company is engaged mainly in the business of automobile products consisting of all types of commercial and passenger vehicles, including financing of the vehicles sold by the Company. The Company markets its commercial and passenger vehicles in various countries in Africa, the Middle East, South East Asia, South Asia, Australia, and Russia and the Commonwealth of Independent States countries. The Company’s automotive segment operations include all activities relating to the development, design, manufacture, assembly and sale of vehicles, including vehicle financing, as well as sale of related parts and accessories. The Company’s all other operations segment mainly includes information technology (IT) services, and machine tools and factory automation services.

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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.