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Macquarie Group Ltd- Difficult to Flip Assets

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Growth in funds management is delivering lower-risk income, and as the largest manager of infrastructure assets globally, we believe Macquarie is well placed to take advantage of a long pipeline of infrastructure projects across transport and renewable energy expected over the medium-term. While Macquarie is in a sound capital position, impairments in asset financing and lending businesses, as well as on its own equity investments are a potential risk in weaker economic conditions. Timing of asset realisation and market conditions can create lumpiness in earnings, we forecast midcycle returns well above Macquarie’s cost of capital.

Key Investment Consideration

  • The strong earnings outlook is reliant on riding the continued investment in infrastructure and energy assets globally.
  • The global business model, management experience, and strong balance sheet provide flexibility for organic growth and acquisitions, but market fluctuations do cause volatility and can result in loss of capital.
  • Macquarie has avoided large regulatory penalties. While we believe the firm should be given credit for its focus on risk management, the risk of hefty penalties due to error or failure to adequately manage potential risks in the future can be ruled out entirely.
  • Macquarie’s position as the largest infrastructure asset manager globally leaves the firm well placed to benefit from underlying demand for assets and investors searching for sustainable income streams.
  • The expansion into funds management has produced more sustainable, less capital intensive, annuity-style income, which will prevent a GFC-like shock to earnings and return on equity.
  • A focus on niche segments of investment banking allows Macquarie to continue to increase earnings globally.
  • Without the support of falling cash rates it is unlikely Macquarie can continue to achieve double-digit returns in infrastructure, resulting in lower performance fee income.
  • Macquarie invests directly in unlisted assets and businesses, and despite being diversified, a large bankruptcy or asset write-down would still have an impact on group profits.
  • A large investment portfolio makes it more difficult for investors to track and identify issues early.

 (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.

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Global stocks Shares

Magellan Financial Group – rand to Attract More Funds

While we don’t believe it will be immune from the structural trends of investors moving to passive investments, continuing fierce competition in the active manager industry and major institutions in-housing some of their asset management, we believe it’s better placed than most active managers to address these headwinds. We also think it’s well position to take advantage from Australia’s growing pool of self-managed superannuation funds that still have a relatively low allocation to global equities. However, continued strong Performance will remain key.

Key Considerations

  • Magellan Financial Group has a high-profile brand. Increasing superannuation balances supported by Australia’s ageing demographic and compulsory superannuation should expand demand for global exposure, and we believe Magellan is well placed to serve growing retail investor demand.
  • Its established presence in the much larger U.S. and U. K. markets gives Magellan further growth opportunities.
  • A strong balance sheet, operating leverage, low capital demands, and strong free cash flow generation supports a high dividend payout ratio and offers investors the best of both growth and income return.
  • A strong long-term track record in international equities allows Magellan to charge investors a premium management fee and has established the firm as a leader in Australia’s wealth-management industry. Continued strong investment performance of flagship funds should support funds flow.
  • Magellan is well managed and benefits from strong long-term growth prospects resulting from increasing numbers of investors seeking to diversify exposure to international equities with a long-term, high-quality stock focus.
  • Magellan’s distribution relationships in the much larger offshore markets of the U.K. and the U.S. give it a stronger growth profile than most domestic peers.
  • The majority of Magellan’s earnings come from a few large funds, meaning it has a high reliance on key investment personnel and the performance of its main funds. Should these personnel leave, or should its main funds underperform for a sustained period, fund outflow could increase to material levels.
  • There is increasing competition from other active international equity managers and new international equity funds from incumbents.
  • The firm faces fee pressure from the increasing popularity of lower-cost alternatives, such as index type products and ETFs.

 (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.

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Mineral Resources – Meets Expectations

Management has significantly improved disclosure, earnings streams have been materially diversified and the investment strategy has consistently generated high returns on invested capital. We expect a well-supplied lithium market in the longer term, coupled with weaker demand growth for steel, particularly from China, to drive lower prices and reduce the pool of available contracting work. Despite this, we think Mineral Resources can drive EPS growth on volume.

Key Considerations

  • Management has significantly improved disclosure, earnings streams have been materially diversified and the investment strategy has consistently generated high returns on invested capital.
  • We think the business model is demonstrably sustainable, centring on Mining Services around Australian bulk commodities.
  • Mineral Resources will selectively own and develop its own mining operations, though with the aim of subsequent sell down while retaining core processing and screening rights.
  • Mineral Resources grew strongly since listing in 2006. The chairman and managing director have been with the business for over a decade and have meaningful shareholdings.
  • Australian iron ore is mainly purchased by Chinese steel producers, meaning Mineral Resources offers leveraged exposure to Chinese economic growth.
  • Mineral Resources has a recurring base of revenue and earnings from processing infrastructure.
  • Mineral Resources’ balance sheet is very strong with net cash. This has opened up the opportunity for lithium investments selling into highly receptive markets.
  • Mineral Resources’ profits are exposed to volatile iron ore price. We expect future iron ore prices to be much less favourable than the decade-long boom to 2014.
  • Investments developing lithium bear fruit now in a booming market, but a strong third-party supply response into a small market risks hollowing out returns.
  • Mineral Resources has poor geographic diversification, with a high dependence on capital activity in Western Australia. Mineral Resources is highly dependent on likely Chinese demand for iron ore.

 (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.

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Property

Mirvac Group – Downside Risks Are Abating

Further out, though, we expect earnings to moderate due to affordability constraints, weak wage growth, and a smaller pipeline. We expect Mirvac to gain market share amid tough conditions, due to its scale and land bank. The group’s commercial property portfolio faces uncertainty from COVID 19. The scorching pace of rental increases seen in office markets in 2019 looks like it will unwind. Meanwhile, we expect existing pressures on retail to continue and likely accelerate.

Key Investment Considerations

  • Because of near-full occupancy and long leases with rental uplifts, medium-term earnings from commercial property are relatively secure. But further out, we expect pedestrian rental growth.
  • Though employees will eventually return to offices, supply and caution from businesses portend a fall in office rents and lacklustre growth thereafter.
  • Very low government bond yields increase the relative attractiveness of Mirvac’s income stream, but the share price could retrace sharply to any unexpected jump in bond yields, a prolonged economic downturn, or further negative earnings surprises.
  • A resumption of inbound immigration should support the value of Mirvac’s assets and underpin the viability of major development projects that the group has in its pipeline.
  • Mirvac has been shifting toward industrial exposure, a sector that was less affected by the coronavirus, and could benefit as businesses seek to invest in local supply chains and e-commerce capabilities.
  • Demand could continue for quality real estate from the likes of pension funds, sovereign wealth funds, and other offshore investors, especially as the Australian economy has dealt with the coronavirus health crisis better than some, which could allow a faster resumption of business activity.
  • Mirvac has heavy exposure to retail department stores, one of the hardest-hit segments in the entire property space.
  • Capitalisation rates on property are unsustainably low. While government bond yields are likely to remain low compared with history, property is not a risk-free asset and should be priced with appropriate risk premiums.
  • Office and industrial rents increased dramatically but are expected to unwind due to coronavirus lockdowns and economic weakness, particularly for office.

 (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.

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Property

Monadelphous Group– Things Slowly Improving

Reputation, experience, and capability are paramount when tendering for work, and Monadelphous developed a strong track record for successful project management, execution, and delivery. Its core skills, knowledge, and ability are in recurring maintenance contract work. The company’s work-in-hand was in steady decline after the 2015 peak in Australia’s LNG construction boom but we think fiscal 2020 is an earnings nadir and new and/or expansion projects from the iron ore, coal, and liquefied natural gas, or LNG, sectors will now drive earnings growth.

Key Investment Considerations

  • Monadelphous must continuously deliver high-quality financial and operational performance on major engineering and maintenance projects to maintain margins and reputation.
  • Monadelphous will only achieve earnings growth if global economic conditions support buoyant investment in domestic mining and energy projects.
  • Monadelphous has a healthy balance sheet, solid cash flow, and experienced senior management.
  • Monadelphous has established an excellent reputation for execution and delivery of structural, mechanical, and electrical work on completed projects, positioning the firm well for future business from large mining and energy companies.
  • The company can leverage the skills, knowledge, and experience gained working on smaller projects into contract wins on larger projects, particularly in the energy, power, and water sectors.
  • Monadelphous has reduced risk relative to peers by partially diversifying into water, power, and marine infrastructure construction and maintenance, which may eventually limit the negative impact on earnings of the downturn in mining and energy work.
  • Monadelphous is ultimately dependent on the commodities and energy investment cycle and global demand. Any major slowdown in economic conditions in China will significantly affect the company’s earnings profile.
  • Monadelphous has steadily decreased staff numbers. Inefficiencies and a fall in productivity are possible as fewer employees are utilised on major projects.
  • Monadelphous’ growth is strongly dependent on key customers, resulting in concentration risk, which is mitigated through multiple contracts across various projects and commodities in numerous locations. However, project deferments by a major client or problems with project execution could significantly affect future profitability.

 (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.

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Small Cap

O’Reilly Starts 2021 Strong as Sales and Profitability Move Sharply Higher, but Shares Seem Rich

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We suspect near-term volatility will remain high (stemming from the pandemic and lapping increasingly difficult comparable growth through 2021), but our long-term targets are still mid-single-digit top-line growth and roughly 20% adjusted operating margins on average over the next 10 years. In our view, O’Reilly remains the strongest of the auto-parts retailers we cover, but we suggest investors await an entry point that affords more of a margin of safety.

Management updated its 2021 guidance, now calling for $24.75-$24.95 in diluted EPS based on a 19.9%-20.4% operating margin (previously $22.70-$22.90 and 19.0%-19.5%, respectively). The exceptional start to 2021 will lead our prior targets higher (from 19.4% and $23.67, respectively), likely toward the top end of each range. Weather and stimulus effects contributed to the brisk sales, as a cold winter spurred vehicle repair needs and customers found themselves with more funds that could be directed toward keeping their cars and trucks on the road and maintained. With vehicle miles driven recovering but still around 10% lower than year-ago marks (as of February, the latest data available from the Federal Highway Administration), we suspect demand will remain robust. We are encouraged that O’Reilly saw strength in its do-ityourself and professional segments; although the former sector drove growth for much of 2020, we expect the latter to maintain momentum as rising vaccination rates lead more Americans who had the option of working from home back to the office. Although this creates some margin pressure (the DIY segment is more lucrative), cost leverage should be a powerful offset, and the professional sector should remain the industry’s long-term growth engine.

Capital Allocation

O’Reilly’s balance sheet remains hearty despite its footprint growth, with modest near-term debt maturities and an appropriate level of indebtedness. Management targets adjusted debt to be 2.5 times adjusted EBITDAR, with the company’s strong performance leading O’Reilly to undershoot that level for the past several years (most recently 2020, when it posted a 1.9 mark). Under CEO Greg Johnson (and his predecessor, Gregory Henslee, who retired in 2018), leadership has prudently prioritized maintaining investment-grade credit ratings, helping to ensure flexibility and continued attractive inventory financing terms.

The firm’s investment approach is noteworthy, as O’Reilly has done well to invest in expanding its store network (and associated cost leverage) while maintaining a top notch distribution infrastructure that is essential to providing industry-leading service levels. This high standard of part availability draws professional and DIY customers and is difficult for rivals to replicate. The company’s recent acquisition of Mayasa Auto Parts in Mexico should mark the start of increasing investments in the new market, but O’Reilly’s successful approach to domestic store network expansion gives us confidence that the firm will act prudently.

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.

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Shares Small Cap

The Pinnacle at Backing and Growing the Right Horses

This allows Pinnacle to benefit from earnings upside as its affiliate boutiques grow in scale and realise operating leverage. A well-known brand and extensive diversification (across managers, asset classes and client cohorts) strengthen Pinnacle’s ability to attract and hold on to FUM across market cycles. Regardless, capital intensity is higher than pure-play asset managers. Dilution from capital raisings, increasing leverage and deploying capital at low rates of return are risks.

Key Investment Considerations

  • Pinnacle’s reputation as a quality growth partner for high performing boutique managers helps attract high calibre asset managers and investors seeking varied investment solutions. Diversity in asset classes, boutiques, and client cohorts provide stability in FUM growth across market cycles.
  • We anticipate ongoing growth in demand for Pinnacle’s solutions due to the increasingly competitive and regulated funds management landscape.
  • Earnings prospects are strong. Notably, there are upsides from the scaling of fixed costs as affiliate boutiques grow in scale, new money from increased distribution and new boutique additions.

Company Profile

Pinnacle Investment Management Group is an Australian-based multi-affiliate investment management firm. The principal activities of the firm are equity, seed capital and working capital, and providing distribution services, business support, and responsible entity services to a network of boutique asset managers, termed as “affiliates.” Apart from deriving revenue from its services, Pinnacle also earns a share of profits from its affiliates via holding equity interests in them. The business is growing rapidly with number of boutiques and FUM more than doubling to 16 and circa AUD 71 billion in December 2020, respectively, from seven and AUD 23 billion in December 2016.

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.

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Veeva Raises Annual Guidance after First-Quarter Revenue Beat

Commercial Cloud results also benefited from adoption of CRM add-ons, which we see as the fundamental driver of long-term growth for the suite. Vault had a very strong quarter as well, bolstered by its Development Cloud that is composed of an end-to-end stack of modules that integrates different components of the drug development process (clinical, quality, regulatory, safety). The company added a record number of new customers to its Vault Quality suite of offerings. Vault Regulatory and Vault Safety also performed well, adding new customers and expanding adoption of modules among existing customers.

Professional services revenue grew an impressive 38% year over year and despite only composing one fifth of total revenue, contributed to more than half of Veeva’s revenue beat, as demand for Vault R&D services and business consulting was higher than anticipated during the quarter. Management expects service revenue to normalize in the second quarter, as it attributes higher utilization of services to the timing of client project starts. Ultimately, services revenue is more volatile than subscription revenue due to its nature (ad hoc versus SaaS), and we are maintaining our long-term revenue growth estimates for the segment.

Veeva anticipates momentum to carry through the rest of the year and has raised total revenue guidance to a range of $1,815 million-$1,825 million (an increase of $60 million over last quarter’s estimates). Taking this raise into account along with a slight improvement in our short-term operating margin estimates, we are raising our fair value estimate to $305 from $300.

Company Profile

Veeva is a leading supplier of software solutions for the life sciences industry. The company’s best-of-breed offering addresses operating and regulatory requirements for customers ranging from small, emerging biotechnology companies to departments of global pharmaceutical manufacturers. The company leverages its domain expertise and cloud-based platform to improve the efficiency and compliance of the underserved life sciences industry, displacing large, highly customized and dated enterprise resource planning, or ERP, systems that have limited flexibility. As the vertical leader, Veeva innovates, increases wallet share at existing customers, and expands into other industries with similar regulations, protocols, and procedures, such as consumer goods, chemicals, and cosmetics.

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.