Categories
Global stocks

Takeda Pharmaceutical top-selling drug Entyvio has strong growth quarter

• Biologic therapy Entyvio is one of the best drugs for treating IBD and will likely see improved sales once a subcutaneous injection is approved.

• Takeda’s pipeline has many interesting early-stage pipeline candidates, some with first-in-class or best-inclass potential, and we could see a boost in sentiment if early data readouts are positive, especially around its orexin program for narcolepsy.

Bears Say

• Takeda’s pipeline is mostly early stage, and success or failure of clinical trials will be critical in determining the market’s perception of the company.

• Takeda’s top-selling drug Entyvio has strong growth, but loss of exclusivity is expected to start in 2024 (for the U.S. and the EU).

• Other important drugs facing loss of exclusivity events within the next few years include Vyvanse, Dexilant, and Velcade.

Company profile

Takeda Pharmaceutical Company Limited engages in the research, development, manufacturing, and marketing of pharmaceutical products, over-the-counter medicines and quasi-drug consumer products, and other healthcare products. It offers pharmaceutical products in the areas of gastroenterology; oncology; neuroscience; and rare diseases, such as rare metabolic and hematology, and heredity angioedema, as well as plasma-derived therapies and vaccines. 

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

BMW: Attractively Valued Stock with a Narrow Economic Moa

× We think the market has priced BMW as though industry-disruptive technology spending will permanently leave margins at cycle lows, a view we do not share owing to the company’s narrow-moat driven by premium brands across the entire product portfolio.

× Our Stage I base case assumes 1% annualized industrial revenue growth versus 6% 10-year historical and average industrial EBIT margin of 6.4% versus the 10-year high, low, and median of 11.6% (2011), negative 0.5% (2009), and 9.0%. We assume a normalized sustainable midcycle of 7.5%.

× The company continues to guide to a long-term 8% to 10% industrial EBIT margin range with 6% to 8% for 2019, excluding a charge for the European Commission’s finding that German automakers colluded on diesel equipment (4.5% to 6.5% including the charge).

× To force our model to generate a fair value equal to the sell-side consensus and the current market valuation, we would have to believe normalized sustainable midcycle margins of 2.1% and 1.5%, respectively.

× Despite the headwinds already baked into our model, our fair value represents upside potential to the sell-side consensus price target and current market valuation of 63% and 76%, respectively.

Bayerische Motoren Werke AG, together with its subsidiaries, develops, manufactures, and sells automobiles and motorcycles, and spare parts and accessories worldwide. It operates through Automotive, Motorcycles, and Financial Services segments. The Automotive segment develops, manufactures, assembles, and sells automobiles and off-road vehicles under the BMW, MINI, and Rolls-Royce brands; and spare parts and accessories, as well as offers mobility services. This segment sells its products through independent and authorized dealerships. The Motorcycles segment develops, manufactures, assembles, and sells motorcycles under the BMW Motorrad brand, as well as spare parts and accessories.

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
Analyst videos Brokers Call Brokers call Expert Insights Fund Manager Interviews Philosophy Stock Talks Technical Picks VidCons Videos

Brokers Call 7 June 2021

Stock exchange market concept, stock broker looking at graph working and analyzing with display screen, pointing on the data presented and deal on a exchange, Businessman trading stocks online.
Brokers-Call-05-June-2021Download

Categories
Dividend Stocks Shares

ResMed Inc ltd – Long-Run Strategy

We forecast the company to gain share in the USD 5 billion sleep apnea treatment market as reimbursement becomes increasingly linked to evidence of patient compliance. We expect to see both commercial and national health insurance payers get on the connected device bandwagon, which benefits the duopoly of ResMed and Philips greatly.ResMed’s recent acquisitions of software services platforms for home healthcare practitioners is a new strategic direction and the company has already pieced together approximately 20% share in this USD 1.5 billion market.

Key Investment Considerations

  • ResMed has a strong position in the structurally growing sleep apnea market, where volume growth has been more than sufficient to offset the price deflation headwind.
  • Cash flow is robust with 100% of earnings represented by free cash flow over the preceding five years, a trend we forecast to continue.
  • Risks remain around tax issues as ResMed has been subject to large tax charges in both the U.S. and Australia in the last two years. We are concerned about the reflection on corporate culture and the potential USD 300 million-plus in taxes and penalties payable.
  • ResMed is taking a “smart devices” and “big data” approach to further entrench itself as one of the two leading players in the global sleep apnea market. The strategy is two-fold – accelerating diagnosis of the underpenetrated market and monitoring patient compliance which keeps diagnosed patients in the treatment net and payers happier to reimburse the cost of respiratory devices.
  • The global sleep apnea market is only 20%-30% penetrated and respiratory device companies are making headway growing volumes around 10% per year, offset by average price deflation of 2%-3%. It is dominated by ResMed and Philips, which together make up an estimated 80% of the USD 5 billion value. ResMed plays a key role in driving diagnosis with its at-home sleep testing devices and ongoing education drive to create awareness of the disease.
  • ResMed has demonstrated a robust top line despite experiencing pricing pressure, and this together with the low financial leverage, leads us to use a below-average cost of equity of 7.5%. This results in a company weighted average cost of capital estimate of 7.4%.
  • The ResMed initiatives to improve sleep apnea diagnosis could result in an acceleration of revenue growth over the next five years. With the sleep apnea market an estimated 50% diagnosed in the U.S. and less in other major markets, the runway for growth is long.
  • Pricing risk for durable medical supplies has played out and pressure could ease going forward resulting in faster top-line growth and expanding margins.
  • The strategic focus on data to support product purchases positions ResMed well to demonstrate the value of its products to the healthcare system.
  • The tax issues that came to light in 2018 could suggest a corporate culture that allows questionable practices in other areas like selling, which is regulated in the U.S.
  • Future cash flows need to fund the total potential historical tax liabilities of USD 300 million over the upcoming years.
  • ResMed is unproven as a software provider, an area it is currently directing a lot of capital to.

 (Source: Morningstar)

Disclaimer

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
Dividend Stocks Technical Picks

Rio Tinto Ltd- Shares Remain Overvalued

Aluminium should constitute a substantially larger share, given the USD 40 billion that Rio Tinto controversially paid for Alcan in 2007, but Rio overpaid. Rio Tinto and BHP have the lowest operating costs of the iron ore players, but despite this being the bulk of company earnings; adjusted excess returns were destroyed by procyclical overinvestment during the China boom.

Key Investment Consideration

  • Rio Tinto is only mildly diversified. Iron ore generates most of the company’s value, and aluminium and copper nearly all of the rest. It’s highly leveraged to China’s steel demand.
  • Rio Tinto’s procyclical capital investment was poorly timed. The invested capital base grew from USD 16 billion in 2005 to USD 105 billion in 2015, after adding back write-offs. Subsequent cost deflation, and lower commodity prices, exposed the folly.
  • Rio overpaid for Alcan and the large acquisition was the first in a number of serious missteps. However, current management is rebuild Rio’s reputation and is favouring cash returns to shareholders.
  • As a commodity producer, Rio Tinto is a price-taker. The lack of pricing power is aggravated by the cyclical nature of commodity prices. Rio Tinto lacks a moat, given that the bloated invested capital base doesn’t permit returns in excess of the cost of capital. The firm’s assets are large, however, and despite being overcapitalised, generally have low operating costs.
  • Rio Tinto is one of the direct beneficiaries of China’s increasing appetite for natural resources. ORio’s cash flow base is somewhat diversified, and is less susceptible to the vagaries of the market than single-commodity producers.
  • The company’s operations are well run and are generally large-scale, low-operating-cost assets. OCapital allocation is likely to be significantly improved following the China boom. Competition for inputs will reduce substantially, while the reduction in cash flow available for investment will mean only the best projects are approved.
  • Mining is seen as a sin activity, and governments may use it as a source of tax revenue to plug shaky budgets.
  • The global economy is cooling. Demand for natural resources in China has peaked, and commodity markets are starting a painful structural decline.
  • Rio Tinto is being viewed as a high-yielding income stock, but resource companies are notoriously unreliable dividend-payers, with cyclical commodity prices often bringing attractive yields undone. ORio Tinto’s investment track record through the boom was woeful. The company paid too much for acquisitions and expanded when it was expensive, permanently diluting returns.

 (Source: Morningstar)

Disclaimer

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

Healthy demand for value stock funds, tepid demand for bonds as the reflation trade kicks in

× Index funds continue to increase their market share at the expense of actively managed funds because of higher inflows (size adjusted).

× Global large-cap blend, US large-cap value, ecology, and financial equity funds saw the highest inflows on a Morningstar Category level in March.

× Corporate bond and US growth equity funds were highly unloved, as were multistrategy products.

× BlackRock topped the list of the asset-gatherers by branding name in the active spectrum; Xtrackers in the passive world.

× Allianz Income and Growth benefited the most among Europe’s largest open-end funds from the demand for risky assets. Conversely, the largest trackers of the S&P 500, IShares Core S&P 500 and Vanguard S&P 500 ETF, continued to bleed.

Long-term fund investors in Europe increasingly fell into line with the dominant global market trend in March as the reflation trade kicked in. This was reflected by a virtual standstill in the net sale data for bond funds, which only took in net EUR 1.2 billion, thus making last March the weakest month in 12 months. This reflects the heavy losses multiple bond segments have suffered over the past months as yields for government bonds rose sharply in the first quarter. The rising optimism of investors for the prospects of a post-coronavirus economy is also reflected in the high inflows of 47.3 EUR billion sent to equity funds. Cyclical sectors and value categories benefited the most from this trend. Conversely, precious-metals funds suffered a rout in March, shedding EUR 1.9 billion, another indication that gold has lost its allure in the current market environment. These outflows were only partly offset by inflows to broad basket and industrial commodity funds, and thus net sales for commodity funds were pushed into negative terrain in March.

Allocation funds enjoyed the highest one-month inflows since February 2018, while alternative funds returned to the red zone, suffering outflows of EUR 400 million after a two-month positive-flow intermezzo. In all, long-term funds garnered healthy inflows of EUR 60.2 billion. Money market funds saw modest outflows of EUR 430 million. Assets in long-term funds domiciled in Europe rose to EUR 10,952 billion from EUR 10,608 billion as of Feb. 28, 2021. This marked a new historic record for Europe’s fund industry.

Active Versus Passive

Long-term index funds posted inflows of EUR 16.9 billion in March versus EUR 43.3 billion that targeted actively managed funds. (The table below only includes data for the main broad category groups.) On the active side, equity funds enjoyed the highest demand, pulling in EUR 29.5 billion, while demand for actively managed fixed-income funds trickled down to EUR 493 million. Equity index funds enjoyed inflows of EUR 17.8 billion, and bond index funds drew in close to EUR 800 million. The market of long-term index funds rose to 20.9% as of March 2021 from 19.5% as of March 31, 2020. When including money market funds, which are the domain of active managers, the market share of index funds stood at 18.5%, up from 16.9% as of March 31, 2020.

Fund Categories: The Leaders

A look at the top-selling long-term fund categories reveals the continued strong demand for global equities. Global large-cap blend equity funds enjoyed an outstanding EUR 11.9 billion of net inflows last month, marking its 10th consecutive month of positive inflows. Passive and active funds shared the spoils, even though the two top sellers within the category were two index funds: HSBC Developed World Sustainable Equity Index Fund and BlackRock ACS World ESG Equity Tracker Fund, with almost EUR 2.0 billion and EUR 1.7 billion, respectively (both are distributed in the United Kingdom only).

US large-cap value equity funds took in EUR 4.8 billion in March, making its best month with regard to flows on record. This arguably indicates that value investors, after a decade in the wilderness, anticipate the so-called “great rotation”: a major turn in the investment cycle from growth to value stocks. The iShares Edge MSCI USA Value Factor UCITS ETF was the most sought-after product of the category, with EUR 1.5 billion attracted.

The equity sector ecology category continued to benefit from the huge demand for environmental, social, and governance and climate-focused funds, garnering inflows of EUR 4.0 billion. ACS Climate Transition World Equity Fund was the fund with the highest demand, with net inflows of EUR 524 million each.

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
Dividend Stocks

Lumen Technologies The Best Dividend Payer

“We think the market has overly punished Lumen’s stock and is overlooking the substantial free cash flow generation and margin expansion opportunities.

Lumen Technologies owns an extensive communications network of over 450,000 route miles of terrestrial and subsea fiber in over 60 countries and 900,000 route miles of copper. Three fourths of Lumen’s revenue is from business customers; the remaining fourth is from the consumer business. Both businesses have posted declining sales in recent years, and we expect that trend to continue.

Prices in the enterprise market are deflationary, as technological advances make data transport cheaper and allow software-defined solutions that cannibalize higher-revenue services. Lumen’s copper-based consumer business offers lower quality than cable alternatives, and it has been bleeding customers. We expect both trends to moderate but not cease, as the firm is upgrading its consumers to better speeds and legacy enterprise technologies will gradually make up a lower portion of sales.

“For income investors, the biggest knock on Lumen is the 54% dividend cut the company made in 2019, though Morningstar analysts believe the current dividend is secure: “We project free cash flow to remain fairly steady throughout our five-year forecast and cover the dividend by more than 2.5 times, on average…given the coverage we forecast, we don’t expect another cut in the near term.”

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

Tabcorp Holdings– Equity Raise Shores Up

Management is admirably transitioning the company into the digital world, with significant investments in online infrastructure and product, while leveraging its incumbent status and physical reach. Further, the addition of Tatts’ near-monopoly lotteries business should help smooth the earnings volatility, and facilitate stronger cash flow generation. This should provide the company with additional financial firepower to reinvest and strengthen its digital wagering offer.

Key Investment Considerations

  • Market infatuation with defensive earnings and yield has propelled Tabcorp’s trading multiple to lofty levels, leaving little margin of safety for investors.
  • While there is a degree of resilience to the company’s earnings, their long-term sustainability is clouded by structural factors because of digital disintermediation and proliferating competition.
  • The critical investment issue remains Tabcorp’s ability to maximise returns from its dominant (and licence-backed) physical distribution channels while managing customers’ migration online.
  • Tabcorp operates three segments. The ostensible spread belies the fact that the wagering (providing betting services) and media (providing racing pictures to complement betting services) division generates more than a third of the group’s earnings.
  • Long-life wagering, lotteries and Keno licences furnish Tabcorp with a stable earnings and cash flow profile, underpinning a relatively high dividend payout ratio.
  • Tabcorp’s retail exclusivity and extensive brick-andmortar distribution presence place the company in a strong position to migrate its wagering customer base to a multichannel environment.
  • While Tabcorp Gaming Solutions is relatively small, it boasts solid growth potential, not just in the core Victorian market, but especially in the New South Wales electronic gaming machine servicing space.
  • The company’s multichannel strategy may fail to stem the spillage of its traditional customers to more nimble and innovative online betting operators, diminishing the value of Tabcorp’s vast physical retail network. OA protracted impact of the COVID-19 pandemic could weigh significantly on Tabcorp’s earnings.
  • Pressure on Tabcorp from structural headwinds could have a downstream impact on the racing bodies (lower product fees), lead to lower-quality races (because of less prize money), and devolve into a negative economic loop for the whole wagering industry.

 (Source: Morningstar)

Disclaimer

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

Simon Property Group Highest yield

Backs of men in uniform looking at new building

In their Best Ideas report, the analysts wrote: “Simon Property Group trades at a steep discount to our fair value estimate. We think the shares have traded down on short-term issues that are already accounted for in our estimates. Investors are worried that the corona-virus will have a dramatic impact on brick-and-mortar retail, which would negatively affect the rents for mall REITs.

Many retailers are likely to declare bankruptcy due to the lack of sales, which will reduce occupancy across Simon’s portfolio.

“However, we believe that Simon’s Class A mall portfolio will recover and show solid growth over the next decade. We recognize that e-commerce will continue to apply significant pressure to brick-and-mortar retail, particularly after the majority of America was forced to do nearly all shopping online for several months. Still, we believe that there will be a continued bifurcation of physical retail performance, with the highest-quality assets continuing to produce strong sales growth and the lower-quality assets experiencing declines in foot traffic and sales.”

The remaining three stocks not in the portfolios are all constituents of the Income Bellwethers watchlist.

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
Shares Technology Stocks

Technology One Ltd – Critics With Cash Flow Jump

Digital tablet display the stock market data

Since the firm turned profitable in 1992, earnings growth has been impressive, as is the track record of client retention. All this testifies to the quality of the company’s products, the benefits of its consistent research and development spending, and the strength of its staff and management. Critically, the nature of enterprise software and its intricate embedding into clients’ technology infrastructure are such that switching costs are very high, something that Technology One has further enhanced through its end-to-end solutions offering and track record of quality delivery.

Key Investment Considerations

  • Technology One offers enterprise software solutions that are deeply embedded in clients’ information technology, or IT, infrastructure, resulting in high switching costs for users.
  • The company generates revenue from software development and implementation, along with subsequent upgrades and ongoing support, providing revenue resilience and an impressive client retention rate. OAlthough the company operates in a highly competitive industry, its earnings growth track record since turning profitable in 1992 has been exemplary and testifies to the quality of the company’s products and staff.
  • Technology One is a provider of Enterprise Resource Planning, or ERP, software in Australia and the United Kingdom. The company has an excellent track record of consistent revenue, NPAT, EPS, and franked dividend growth over the past 30 years, and the asset light nature of the company has supported strong cash generation and a consistently strong balance sheet.
  • Technology One’s business model captures value in the entire software development and implementation chain. It develops and markets the software, implements the solution for clients, and offers ongoing subsequent support.
  • The company’s software products are embedded in customers’ business operations, locking in existing clients and underpinning recurring revenue streams in post-sales support and licence fees.
  • Cross-selling opportunities remain, as products taken up per customer are low at three, compared with 12 available in Technology One’s enterprise product suite.
  • Skills shortages in the information technology sector mean the loss of key personnel can be costly, and bidding for talent may drive up labour expense.
  • Development delays with new products and failure to keep pace with technological changes could significantly affect Technology One’s ability to compete in the fast-moving enterprise software industry.
  • Failure of the international expansion strategy in the United Kingdom could dent the company’s longer-term growth profile.

 (Source: Morningstar)

Disclaimer

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.