Categories
Commodities

Downer EDI Ltd

But the fair value impact of the earnings declines is countered by boosted cash levels from the asset sales. It should be noted the company still provides no earnings guidance for fiscal 2021 given uncertainty around coronavirus.

Our unchanged fair value equates to a fiscal 2025 EV/ EBITDA of 6.2, P/E of 14.5, and dividend yield of 4.1% on a reinstated 60% payout. We now assume a 5-year EBITDA CAGR of 5.9% to AUD 945 million by fiscal 2025, and a midcycle EBITDA margin of 7.4%. The margin forecast is above the 5-year historical average nearer 6.5% and first half fiscal 2021’s 6.0%. This anticipates a recovery from Spotless Group which recorded a 6.4% margin in first-half fiscal 2021, down from levels nearer 8.0% prior to fiscal 2020.

At around AUD 5.60, Downer shares have more than doubled from sub-AUD 2.60 March 2020 lows, and are now only somewhat undervalued. Downer is exiting mining in pursuit of more capital-light and government-backed revenue business models in urban services including in operating, maintaining, servicing, and supply. If mining cools as per our thesis, Downer could be viewed in a more favourable light by a market currently enamoured with mining.

Downer finished December 2021 with net debt of AUD 1.1 billion excluding operating leases–improved on June 2020’s AUD 1.5 billion–gearing ND/(ND+E) at a comfortable 28%, down from 36% six months prior. We now estimate net debt at around AUD 550 million, following the latest round of asset sales, ND/(ND+E) at just 15%. This would have net debt/EBITDA at a conservative sub 1.0. But Downer says its optimal capital structure is net debt at 2-2.5 times EBITDA, meaning capital returns and acquisitions could feature.

In the June half to date, Downer has undertaken combined asset sales of AUD 605 million, of which proceeds of AUD 476 million have so far been received. This includes sale of Open Cut Mining West for over AUD 200 million, sale of Downer Blasting Services for AUD 62 million, sale of plant and equipment to Byrnecut at Carrrapateena mine for AUD 70 million, sale of 70% of laundries for AUD 155 million, and sale of the Otraco tyre management business to Bridgestone Corporation for AUD 79 million.

Remaining noncore assets on the block including Mining Open Cut East and hospitality with the sale process underway. Downer currently has AUD 36.2 billion of work-in-hand, equivalent to a healthy three years of revenue at current rates. The most recently announced is a AUD 900 million eight-year contract to operate and maintain Sydney Northern Beaches buses through Downer’s 49% participation in the Keolis Downer joint venture.

Profile

Downer operates engineering, construction, and maintenance; transport; technology and communications; utilities; mining; and rail units. But the future of Downer is focused on urban services, and mining and high-risk construction businesses are being sold down. The engineering, construction, and maintenance business has exposure to mining and energy projects through consulting services. The mining division provides contracted mining services, including mine planning, open-cut mining, underground mining, blasting, drilling, crushing, and haulage. The rail division services and maintains passenger rolling stock, including locomotives and wagons.

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
Technology Stocks

WiseTech Global Ltd – Share Price Jump

The narrow economic moat, which is based on switching costs, and strong annual client retention rate of around 99%, should protect earnings from competition as the business grows. We expect revenue growth and the scalable business model to drive margin expansion, and we forecast an improvement in the EBIT margin from 19% in fiscal 2020 to 33% by fiscal 2030. However, we expect ongoing investment in capitalised research and development to cause weak cash conversion for the foreseeable future.

Key Investment Considerations

  • WiseTech to continue growing quickly as its global software-as-a-service logistics platform replaces legacy and in-house software, and we forecast a revenue CAGR of 13% over the next decade.
  • WiseTech had an annual customer retention rate of over 99% in each of the four years to fiscal 2016, which we expect to continue for the foreseeable future.
  • WiseTech founder Richard White retains significant influence over the company as its CEO and largest shareholder.
  • WiseTech has a narrow economic moat based on customer switching costs, as evidenced by a very high customer retention rate of over 99% for the past four years. The economic moat should protect returns and
  • margins from competition.
  • WiseTech’s revenue is expected to continue growing strongly over the next decade as its logistics software platform replaces in-house and legacy software solutions. A high degree of operating leverage should create even stronger EPS growth.
  • The capital-light business model should enable the balance sheet to remain debt-free, with operating cash flow covering research and development spending and dividend payments.
  • WiseTech competes against much larger competitors, such as SAP, Oracle, and in-house developed software of the major logistics companies.
  • Cash conversion is poor due to reinvestment in the business, meaning the company must achieve earnings growth to justify this investment.
  • Disclosure is not as extensive as we would like, and the founder, major shareholder, and CEO Richard White arguably creates key-person risk.

 (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

Vicinity Centres– Support Long-Term Earnings

Vicinity’s assets are high quality but have exposure to tourism and luxury consumption, leaving earnings vulnerable to coronavirus shutdowns and economic thrift. Some assets have redevelopment potential, including the addition of apartments, hotels and offices. Vicinity’s AUD 14 billion of directly and indirectly owned malls are skewed to larger shopping centres. By official classifications, it has about 22% in super-regional, 29% in regional, 16% in CBD, 19% in subregional, 12% in outlets, and 1% in neighbourhood centres.

Key Investment Consideration

  • Vicinity Centres is more sensitive to the economic cycle than most other retail REITs due to its exposure to tourism, CBD, and luxury spending.
  • About half of Vicinity Centres’ portfolio is in Victoria, and about 16% in CBDs, mainly Melbourne, Sydney, and Brisbane. So far, these areas have been the most affected by the coronavirus. The remaining portfolio is diversified around Australia.
  • Exposure to food, beverage, entertainment, and service based tenants increased since 2015. These categories are less prone to e-commerce competition but vulnerable to thrift, border closures, the absence of CBD workers, and social distancing.
  • Vicinity is arguably the REIT most exposed to an economic and health recovery. Should a effective treatment for COVID-19 be developed, Vicinity would likely outperform other REITs as conditions normalise. OVicinity has the strongest balance sheet of the large and high-end mall operators listed in Australia, so the risk of another dilutive equity raising is low.
  • Vicinity has substantial development opportunities, including the Bankstown and Box Hill town centres, Chatswood Chase upgrade, and apartment developments at The Glen.
  • Even if regulations on distancing and borders return to normal, consumers have already begun to form new habits, including working from home, shopping online, and thrifty shopping habits.
  • Vicinity has about a fourth of its leases up for negotiation in fiscal 2021, meaning it is more exposed to the economic downturn than rival REITs.
  • Vicinity is much more exposed to border closures and work-from-home trends due to its substantial reliance on tourism and luxury spending, and CBD office workers.

 (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 Shares

Vocus Group Ltd – Spin Off Business

Closeup of a stock market broker working with graphs on digital tablet at office. Rear view of stock agent reading bad report and graph. Back view of multiethnic businessman analyzing fall sales.

The February 2016 merger between these companies transformed the enlarged Vocus into a full-service, vertically integrated player with the necessary ammunition to materially lift its share in all segments of the Australian and New Zealand telecommunications markets. However, the group has been beset by integration and execution risks, leading to a string of board and management changes. Under new management, the turnaround is now progressing solidly.

Key Considerations

  • Vocus’ extensive fibre network infrastructure has the potential to materially lift the company’s share of the corporate and small business telecommunications markets.
  • Vocus’ Australian retail unit faces margin pressure in the National Broadband Network, or NBN, era.
  • Vocus is well and truly past the “fix and repair” stage, and is on the “shed and grow” phase of its journey, with network services clearly identified as its core unit longer-term.
  • Vocus owns and operates an extensive fibre network that drives attractive economics in its fibre and Ethernet business and provides a durable competitive advantage.
  • The marriage of Vocus’ infrastructure and M2’s strong salesforce has the potential to materially lift the company’s share of both the corporate and the small business markets.
  • Vocus’ presence in the New Zealand telecommunications market is underappreciated by investors and is a fertile source of growth.
  • The merger with M2 has exposed Vocus to the margindilutive NBN regime.
  • While steps are being taken to improve in these areas, it is abundantly clear Vocus has bitten off more than it can chew with its recent spate of mergers and acquisitions, with reporting and technology systems woefully inadequate for what is a major player in the telecom big leagues.

 (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 Shares

Wesfarmers Ltd – Exceptional Growth

Wesfarmers is one of Australia’s largest private-sector employers, with more than 100,000 employees. Wesfarmers has a wide moat, which is sourced from cost advantages derived from its significant retail scale. After the demerger of Coles in 2018, returns on equity are no longer affected by goodwill associated with the 2008 acquisition of Coles and returns on invested capital comfortably exceed the group’s weighted cost of capital.

Key Investment Consideration

  • Leading Australian hardware retailer Bunnings generates about half of the group’s operating income and we expect the chain to continue building its market share. Bunnings is exposed to the health of the Australian housing market and the cyclical weakness in home prices is likely to negatively affect sales and profitability.
  • Wesfarmers offers investors an opportunity to diversify across different categories in the discretionary retail sector, beyond hardware, with additional diversification provided by its smaller industrials division.
  • Wesfarmers is Australia’s best-known conglomerate. Activities span discount department stores, office supplies, home improvement, energy manufacture and distribution, industrial and safety supplies, chemicals, and fertilisers. Business interests can be divided into two broad groups: retail and industrial.
  • The company’s hardware store footprint across the Australian economy and its leading market positions within several segments, combined with strong underlying return on invested capital (before goodwill), lead to our wide moat rating.
  • Wesfarmers is one of Australia’s largest retailers, and despite the Coles demerger, still earns around 80% of sales from the retail channel across discount department stores, hardware/home improvement, and office supplies.
  • The Bunnings is the undisputed leader in Australian home improvement retailing. Based on its market position, Bunnings could start giving up some volume growth and improve profitability by increasing prices. OThe diversification of Wesfarmers’ revenue streams across multiple retail categories and industrial businesses lowers earnings volatility and better predictability of dividends for income investors.
  • Wesfarmers’ strong balance sheet lowers funding costs, but also provides the financial firepower to opportunistically pursue acquisitions.
  • Wesfarmers’ retailing businesses are pro-cyclical and the near-term outlook for the Australian economy and consumer spending is mixed at best.
  • Mergers and acquisitions are risky and can be value destructive to shareholders. Wesfarmers’ most recent acquisition, Homebase in the U.K. and Kidman Resources were ill-timed and cost investors dearly.
  • The department store segment is grappling with intense competition from online, international apparel retailers and most importantly Amazon Australia, but are also confronted with the secular decline of thedepartment store format.

 (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 Shares

Westpac Banking Corp– Earnings To Retrace

Margins are currently being compressed as cash rates fall to historically low levels and demand for credit growth remains weak. Starved of revenue growth opportunities, the bank will focus on cost-cutting initiatives. A significant penalty for breaching anti-money-laundering laws has been agreed hurts 2020 earnings, as will higher loan impairment expenses over the next few years. During tough economic conditions, capital strength is paramount, with the dividend payout ratio expected to remain between 50% and 70%.

Key Investment Considerations

  • Market concerns about housing and weaker economic conditions are exaggerated. After a period of exponential growth Australian house prices cooled in 2017 and 2018, but a collapse remains unlikely without a sustained spike in unemployment.
  • Cost-saving initiatives are needed to further improve operational efficiency and increase returns.
  • Common equity Tier 1 capital exceeds regulatory requirements but changes to capital requirements in New Zealand, regulatory penalties, rising credit stress, and additional customer remediation costs have the potential to reduce this comfortable position.
  • Improving economic conditions underpin profit growth from fiscal 2021. Productivity improvements are likely from fiscal 2022.
  • Cost and capital advantages over regional banks and neo-banks provide a strong platform to drive credit growth.
  • Consumer banking provides earnings diversity to complement the more volatile returns generated from business and wholesale banking activities.
  • The withdrawal of personal financial advice by Westpac salaried financial advisors reduces compliance and regulatory risk.
  • Slow core earnings growth has resurfaced because of low loan growth, margin compression, subdued wealth and markets income, lower banking fee income.
  • A sound capital position will be tested by inflation in risk weighted assets.
  • Increasing pressure on stressed global credit markets could increase wholesale funding costs.
  • Bad debts remain under control, but large provisions are being taken in anticipation that COVID-19 will have a large negative impact on many businesses and households.

 (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
Commodities Trading Ideas & Charts

Woodside Petroleum – Ideally Placed

Under its watch, the number of LNG trains has grown from one to five, taking gross output to 16.4 million metric tons per year. This pedigree is unmatched in the Australian oil and gas space, and there’s more potential development in the pipeline if prices will allow. Missteps, including commissioning delays and cost blowouts during the China-driven resources boom, are now past. Woodside has demonstrated commendable conservatism in capital allocation over several years.

Key Investment Considerations

  • More than 80% of our Woodside fair value estimate derives from one product, LNG. LNG prices are referenced on a three-month running lag to the Japanese Customer Cleared oil price, so oil prices are key to any analysis.
  • Including Pluto Train 2 and Other Prospects, around 30% of our fair value estimate derives from projects yet to produce any gas, reflecting our expectation for substantial growth.
  • We are comfortable with a high proportion of value in development projects, given Woodside’s proven LNG delivery platform and first-mover advantage on the North West Australian coast.
  • As Australia’s premier oil player, Woodside Petroleum’s operations encompass liquid natural gas, natural gas, condensate and crude oil. However, LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside. Future LNG development, particularly relating to the Pluto project, encompasses a large percentage of this company’s intrinsic value.
  • Woodside is well suited to the development challenge. With extensive experience, it remains a stand-out energy investment at the right price. Gas is the fastest growing primary energy market behind coal, and the seaborne-traded LNG portion of that gas market grows faster still. China is building several import terminals, and so demand is likely to pick up, helping to move LNG pricing toward oil parity on an energy-equivalent basis.
  • Woodside is a beneficiary of continued global economic growth and increased demand for energy. Behind coal, gas has been the fastest-growing primary energy segment globally. The traded gas segment is faster-growing still, and Woodside is favourably located on Asia’s doorstep.
  • Woodside’s cash flow base is comparatively diversified, with LNG production making it less susceptible to the vagaries of pure oil producers. Gas is a primary component of Asian base-load power generation, instilling an element of demand stability, and is generally sold under long-term contracts.
  • Gas has around half the carbon intensity of coal, and it stands to gain market share in the generation segment and elsewhere if carbon taxes are instituted, as some predict.
  • The global economy is cooling off and demand for energy will follow suit, particularly if Chinese growth rates taper.
  • Technological advances in the nonconventional U.S. shale gas industry have the potential to swing the demand supply balance increasingly in favour of the customer.
  • LNG developments are hugely expensive, and the balance sheet is at risk until such projects are successfully commissioned.

(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
IPO Watch

IPO Maximises Pexa’s Value but Link Fair Value Estimate Maintained

However, it appears Pexa will achieve an initial public offering, or IPO, enterprise value of AUD 3.3 billion, which is considerably higher than our prior AUD 2.20 billion valuation as of October 2020, and KKR’s now withdrawn AUD 3.10 billion enterprise value-based offer, made last week. It’s also 70% above the implied AUD 1.95 billion offered by the PEP/Carlyle Group Consortium in October 2020. Link’s board and executives have played their Pexa cards shrewdly to maximise value for Link shareholders which has significantly reduced the gap between Link’s share price and its fair value. All else equal, we’re indifferent as to whether this happens by selling the Pexa stake or via retaining the shareholding in a listed company. However, at the current market price of around AUD 5.20 per share, we still believe Link is materially undervalued.

We estimate Pexa has around AUD 150 million in cash, implying an equity value of AUD 1.52 billion for Link’s 44% shareholding at the IPO valuation. Media reports indicate Pexa will borrow AUD 300 million before its IPO and that most of Pexa’s cash will be returned to its existing shareholders. This implies around AUD 200 million in cash that will be attributable to Link, however, Link’s announcement indicates around AUD 150 million of this cash is likely to be reinvested into Pexa at the IPO to increase its shareholding to 47%. We expect the Pexa shares made available via the IPO will mainly come from the full sell-down of Morgan Stanley’s 40% shareholding in the company, with both Link and the Commonwealth Bank of Australia likely to increase their shareholdings.

The AUD 1.52 billion valuation of Link’s Pexa stake is a far better outcome than the AUD 1.14 billion we estimated Link would receive via a trade sale to KKR. However, unlike the KKR valuation, our IPO-based valuation excludes any deduction for capital gains tax. Quantifying the tax owed on the Pexa investment by Link is complicated under the IPO scenario because we expect Link will ultimately distribute its Pexa shareholding to Link shareholders via an in-specie distribution. We expect this option will enable retail shareholders to claim the 50% capital gains discount on their Pexa shares. However, we await the tax ruling on the Pexa shareholding and recommend Link shareholders seek independent taxation advice on this issue.

All else equal, Pexa’s AUD 3.3 billion enterprise value could increase our Link fair value by AUD 1.00 per share to AUD 7.90. However, due to the uncertainty regarding the details of the IPO, and particularly the tax implications for Link shareholders, we have maintained our fair value pending the release of additional information from both Link and Pexa. We also intend to reassess our Pexa valuation based on the IPO prospectus and management roadshow, and particularly the potential earnings upside from exploiting its data and overseas expansion.

We are also yet to determine the extent to which Pexa’s market value is incorporated into Link’s carrying value of the Pexa stake.

Link Administration Holdings Ltd Company Profile

Link provides administration services to the financial services sector in Australia and the U.K., predominantly in the share registry and investment fund sectors. The company is the largest provider of superannuation administration services and the second-largest provider of share registry services in Australia. Link acquired U.K.-based Capita Asset Services in 2017; this provides a range of administration services to financial services firms and comprises around 40% of group revenue. Link’s clients are usually contracted for between two and five years but are relatively sticky, which results in a high proportion of recurring revenue. The business model’s capital-light nature means cash conversion is relatively strong.

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

Strong Cycling Demand Amid Pandemic Drives Record Sales for Shimano in First Quarter of 2021

Shimano has capitalized from a significant rise in demand for bicycles since the second half of last year, as its bicycle component business (which makes up about 80% of revenue) boasts the leading global share of medium/high-end gears. The rise in demand is attributed to more people partaking in cycling as a mode of transportation and as an outdoor activity that allows people to avoid close-contact in crowded spaces amid the pandemic. We expect sales to remain at similar, high levels for the second quarter, as retailers in Europe and North America (Shimano’s largest markets) as well as bicycle frame manufacturers look to restock their inventory to keep up with demand.

We currently assume record sales with a 17% year-on-year growth in fiscal 2021, but we continue to pay attention to: 1) any potential signs of whether some of the momentum starts to slow down in the second half compared with recent peak levels, as increased vaccinations might lead to other interests than activities that promote social distancing; and 2) further improvement in supply chain-related issues to keep up with high demand levels. The company has been able to improve capacity utilization to better meet increasing demand, compared with last year, by eliminating many of the bottlenecks related to production. Further, with construction of a new factory in Singapore, we expect this will increase total production capacity by about 10% next year. While fixed costs related to the construction will likely impact margins in the near term, we still think Shimano will realize operating margin expansion in 2021, to an all-time high of 23% from 21.9% in 2020.

Shimano also witnessed a record top-line growth rate of 64% year on year, in the first quarter. Aside from strong retail sales of bicycles and related products in Europe and North America in the first quarter of this year, the comparable period a year ago was weak due to demand initially plummeting as lockdown measures meant many people stayed at home. Fishing tackle sales, which essentially makes up about the remaining 20% of companywide sales, also increased by 26% year on year in the first quarter from a warm winter in Japan as well as strong demand across its key overseas markets. As a result of increasing divisional sales across all business segments and improved capacity utilization, operating margin for the quarter also reached its quarterly peak at 25.8%, up from 16.5% in the same quarter previous year.

We note orders for its new high-end EP8 sport e-bike components series were favorable this quarter, implying an improvement from the previous year in fiscal 2020 when capacity constraints led to year-on-year declines in product sales. Further, and more importantly, this reaffirms our view that the company is able to adapt to evolving trends to remain competitive in newer areas within the cycling industry. According to management, e-bike components currently make up about 10% of Shimano’s total bicycle segment’s divisional sales and is expecting related sales to increase to record levels at about 40% higher than in 2019. As demand for its new high-end products, like the EP8 as well as the Deore MTB components, continue to grow, we expect favorable product mix will also contribute to improved margins in 2021.

Shimano Inc Company Profile

Shimano develops, manufactures, and distributes bicycle components, fishing tackle, and rowing equipment. The company also develops and distributes lifestyle gear products, such as apparel items, shoes, bags, and related items. Approximately 80% of companywide operating income comes from its bicycle components segment. It has operations in Japan, Asia, Europe, North America, Latin America, and Oceania. The company was founded in 1921 and its headquartered are in Osaka, Japan.

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
Shares Technology Stocks

Airbus Build Rate Announcement Prompts Us to Slightly Bump Up Our GE Fair Value Estimate

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.

First, GE has materially reduced its debt burden by $30 billion during Culp’s tenure. While some portfolio decisions like the sale of biopharma were painful, they were well-priced and provide the firm with critical flexibility to shift from a persistent defensive to offensive posture. While GE industrial net debt/EBITDA remains high, we think that the eventual aerospace recovery and continuous improvement initiatives will help drive this figure below 2.5 times by 2023. The gradual sale of Baker Hughes furthers GE deleveraging goals, while allowing the firm to focus on its core portfolio.

Second, we believe narrow-body commercial revenue should recover at a more accelerated pace relative to wide-bodies given favorable domestic over international travel trends. We also expect highly profitable narrow-body aftermarket services will recover ahead of the rest of the commercial aerospace portfolio since this business is driven by departures as opposed to revenue passenger miles. Deferring shop visits can add 20%-30% to airlines’ costs, and passenger survey data persistently reveals a majority of passengers are willing to travel once vaccinated. From this standpoint, GE is well-positioned to capitalize on this trend, with more narrow-bodies that are 10 years or younger than the rest of the industry, and roughly 62% of its fleet seeing one shop visit or less. At a minimum, we believe GE has an opportunity to enjoy strong incremental margins on a recovery matching decremental margins during the recession.

Finally, healthcare is a global leader in precision health, with technology helping practitioners gain valuable insights and eliminating waste in the healthcare system. We expect 50-basis points of consistent margin improvement on lower mid-single-digit growth.

Fair Values and Profit Maximisers

After reviewing Airbus’ announcement that it’s increasing production rates for the A320 family to 64 per month by the second quarter of 2023, we raise our GE fair value estimate to $15.70 from $15.30. Airbus may ask suppliers to enable production rates to as high as 75 per month by 2025. However, we would like to see Airbus build a bigger backlog before increasing our forecast to these levels. Even so, we think this supports our view that the back half of 2021 should witness a rosier commercial aero outlook based on the domestic travel data we previously highlighted.

Even with an estimated $3.7 billion headwind from the end of most of GE’s factoring program, we’re expecting just over $4.6 billion of industrial free cash flow. We also model adjusted EPS of $0.28 for 2021, just over the top end of management’s guide. Nonetheless, we still value GE at over 20 times 2023 adjusted EPS, or about 17.5 times 2023 industrial free cash flow per share. In our view, the two most important contributors to GE’s earning power lie in GE Aviation and GE Healthcare. Aviation will have significant headwinds in the front half of 2021. Nonetheless passenger survey data and airline booking data suggest significant pent-up demand. Longer term, we think global middle income class growth will drive demand once more and help GE commercial aviation recover lost sales by 2024 to year-end 2019 levels. GE’s fleet is young and strongly positioned in narrow bodies, which should help GE as domestic travel recovers ahead of international travel. Further, a majority of its fleet is still yet to see over one shop visit. Airlines deferring maintenance, moreover, can add considerable costs to their bottom line.

As for GE Healthcare, we assume key market drivers include increased access for healthcare services from emerging economies and an aging U.S. population, coupled with digital initiatives that save practitioners’ time, while protecting them from risks. Rolling this up, we believe these factors will help drive lower mid-single-digit sales growth, coupled with a minimum 25 basis point improvement in year-over-year margins. For Power and Renewables, we see both segments benefiting from the energy transition, but with the lion’s share of the sales growth opportunity flowing through to renewables. That said, we expect minimal contributions to profitability over the next couple of years from either business, before ramping up to mid-single-digit plus margins by midcycle.

General Electric’s Company Profile

GE was formed through the combination of two companies in 1892, including one with historical ties to American inventor Thomas Edison. Today, GE is a global leader in air travel, precision health, and in the energy transition. The company is known for its differentiated technology and its massive industrial installed base of equipment sprawled throughout the world. That installed base most notably includes aerospace engines, gas and steam turbines, onshore and offshore wind turbines, as well as medical diagnostic and mobile equipment. GE earns most of its profits on the service revenue of that equipment, which is generally higher-margin. The company is led by former Danaher alum Larry Culp who is leading a multi-year turnaround of the storied conglomerate based on Lean principles.

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.