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Commodities

California’s Clean Energy Policies Support PG&E’s Growth Outlook

Business Strategy & Outlook

PG&E emerged from bankruptcy in July 2020 after 17 months of negotiating with 2017-18 Northern California fire victims, insurance companies, politicians, lawyers, and bondholders. Shareholders lost some $30 billion in settlements, fines, and costs, but PG&E exited with bondholders made whole and shareholders still in control. The new PG&E is well positioned to grow rapidly, given the investment needs to meet California’s aggressive energy and environmental policies. PG&E is set to invest more than $8 billion annually for the next five years, leading to 9% annual growth. After suspending its dividend in late 2017, PG&E is well positioned to reinstate it in 2024 based on the bankruptcy exit plan terms. California’s utility ratemaking regulation is highly constructive with usage-decoupled rates, forward-looking rate reviews, and allowed returns well above the industry average. The California regulators will support premium allowed returns to encourage energy infrastructure investment to support the state’s clean energy goals, including a carbon-free economy by 2045. This upside is partially offset by the uncertain future of PG&E’s natural gas business, which could shrink as California decarbonizes its economy. PG&E will always face public and regulatory scrutiny as the largest utility in California. That scrutiny has escalated with the deadly wildfires and power outages. Legislative and regulatory changes during and since PG&E’s bankruptcy have reduced the company’s financial risk, but the state’s inverse condemnation strict liability standard remains a concern. CEO Patti Poppe has a tall task mending PG&E’s relationship with customers, regulators, politicians, and investors. The $59 billion bankruptcy was PG&E’s second in 20 years and likely its last. The 2020 bankruptcy exit terms all but guarantee a state takeover if PG&E has any safety or operational missteps. PG&E is still under court and regulatory supervision following the 2010 San Bruno gas pipeline explosion. The fines and penalties from the San Bruno disaster and allegations of poor recordkeeping resulted in $3 billion of lost shareholder value.

Financial Strengths

Following the bankruptcy restructuring, PG&E has substantially the same capital structure as it did enter bankruptcy in line with its regulatory allowed capital structure. Many of the same bondholders hold PG&E’s $38 billion of new or reinstated debt. PG&E will use securitized debt to eliminate $6 billion of temporary debt at the utility and further fortify its balance sheet. The PG&E to maintain investment-grade credit ratings with EBITDA/interest coverage near 5 times. State legislation in 2019 will help mitigate some of PG&E’s fire-related risks and support investment-grade credit ratings. The post-bankruptcy equity ownership mix is much different. PG&E raised $5.8 billion of new common stock and equity units in late June 2020, representing about 30% ownership. Another $3.25 billion of new equity came from a group of large investment firms. The fire victims trust owned 438 million shares, or 22%, and legacy shareholders retained about 26% ownership at the bankruptcy exit. The fire victims’ trust has sold 100 million shares as of May 2022 and now owns about 15% of the company. The PG&E will invest more than $8 billion annually during the next few years. Tax benefits and regulatory asset recovery should result in minimal new equity and debt needs at least through 2023. PG&E entered bankruptcy after a sharp stock price drop in late 2018 made new equity prohibitively expensive and the company was unable to maintain its 52% required equity capitalization. Bankruptcy settlements with fire victims, insurance companies, and municipalities totaled $25.5 billion, of which about $19 billion was paid in cash upon exit. The PG&E will be prepared to reinitiate a dividend in 2024 after meeting the terms of its bankruptcy settlement. Before PG&E cut its dividend in late 2017, as an anticipated 6% annual dividend growth, in line with earnings growth. PG&E went six years without a dividend increase following the 2010 San Bruno gas pipeline explosion.

Bulls Say

  • California’s core rate regulation is among the most constructive in the U.S. with usage-decoupled revenue, annual rate true-up adjustments, and forward-looking rate setting. 
  • Regulators continue to support the company’s investments in grid modernization, electric vehicles, and renewable energy to meet the state’s progressive energy policies. 
  • State legislation passed in August 2018 and mid-2019 should help limit shareholder losses if PG&E faces another round of wildfire liabilities.

Company Description

PG&E is a holding company whose main subsidiary is Pacific Gas and Electric, a regulated utility operating in Central and Northern California that serves 5.3 million electricity customers and 4.6 million gas customers in 47 of the state’s 58 counties. PG&E operated under bankruptcy court supervision between January 2019 and June 2020. In 2004, PG&E sold its unregulated assets as part of an earlier post-bankruptcy reorganization.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Global stocks Shares

Blackmores has seen strong growth in its international segment

Business Strategy & Outlook

Blackmores’ customer profiles are very different in its two key markets, Australia and China. Vitamin-taking Australians tend to be older or females either before or during pregnancy, while in China the market is dominated by young, online shoppers who view international vitamin and dietary supplements as luxury purchases. Nonetheless, the importance of perceived product quality—largely

an extension of brand positioning—is common to both customer groups. Blackmores’ brand intangible assets support its narrow economic moat. Blackmores’ position within the core Australian market as stable and the market as well penetrated. Actual performance in Australia is clouded by informal exports of products purchased for the daigou channel and sent to China. In fiscal 2021, roughly 9% of ANZ sales were ultimately sent to China. While this contribution remaining below 10% due to coronavirus and regulatory changes requiring daigous to register as businesses and pay taxes, this will be offset by growth in the direct China segment.

China presents a large opportunity for Blackmores as it is the second-largest global VDS market after the U.S, and it will contribute roughly 30% of group revenue at mid-cycle. Other than the informal daigou trade, Blackmores primarily distributes into China via cross-border e-commerce where the product is sold on online platforms. Further opportunity lies in establishing a sizable offline retail business, but this hinges on the company obtaining regulatory approval. Blackmores has seen strong growth in its international segment, which now contributes more to earnings than the China segment

and is forecast to remain larger. The segment is largely composed of regions in Southeast Asia including Malaysia, Thailand and Indonesia. Blackmores aims to continue the momentum after entering India in 2021 and gaining halal accreditation to serve Muslim consumers, particularly in Indonesia.

Financial Strengths

Blackmores is in a solid financial position with net cash of AUD 92 million as at June 2022. It should maintain its net cash position over the forecast period and afford a 45% dividend payout ratio. Free cash flow conversion of net income has averaged 102% over the preceding five years (before acquisitions), above the average 54% dividend payout ratio. Free cash conversion of net income to average 93% over the next five years.

Bulls Say

  • A reputation for quality is fundamental in the VDS market and Blackmores’ reputation is untarnished.
  • Bar fiscal 2020, the company has earned returns on invested capital well above its single-digit cost of capital, demonstrating its brand strength and associated pricing power.
  • Blackmores’ new CEO brings experience in navigating international brand sales and distribution in Asian markets which should allow the company to progress its business outside of Australia.

Company Description

Blackmores is a leading Australian vitamin and health supplement manufacturer and is the larger of two major vitamin brands by market share in Australia. Overseas sales also contribute a significant amount to earnings, particularly from Southeast Asia and the Chinese market via both formal (cross-border e-commerce) and informal (daigou) sales channels.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Technology Stocks

Cochlear is investing significantly to increase awareness as well as funding research to support payer reimbursement

Business Strategy & Outlook

Cochlear is the market leader in cochlear implants with a consistent share of roughly 60% across developed markets. Cochlear implants became the standard of care many years ago for children in developed markets with profound hearing loss or deafness. With this market segment largely penetrated, the company is looking elsewhere for growth with developed-markets adults the next primary focus and emerging-markets children after that. Roughly 70% of units are sold to developed markets and the remaining 30% to emerging markets, where over 90% are for children. Large price differentials in the lower range of products result in 80% of revenue being earned in developed markets and 20% in tender-oriented emerging markets. The average unit prices achieved in developed markets are double those in emerging markets. In the developed-markets children segment, the growth tailwinds from increasing market penetration and the shift from single to bilateral implants over the last 15 years have played out, and forecast growth in this segment to reduce to the birth rate over time.

The adult developed market is more difficult to penetrate, and required investment to expand this segment will restrain significant operating margin expansion. Currently, penetration is still estimated to be under 5%, and Cochlear is at a pivot point as it invests to be adopted more widely by seniors with profound hearing loss. Prevalence of profound hearing loss increases over 65 years and has a steep increase over 80 years of age. As such, an ageing population and low penetration suggest a large opportunity. However, hearing aids, not cochlear implants, are the standard of care. Cochlear is investing significantly to increase awareness as well as funding research to support payer reimbursement. But two main challenges can be seen to accessing this market fully: first, the relatively low willingness of older candidates to undertake such invasive surgery, and second, the improvements

in hearing aids. The hearing aid market is increasing its penetration in the severe hearing loss category, leaving only the smaller profound hearing loss as the cochlear implant niche.

Financial Strengths

The company has typically enjoyed low capital intensity and high cash conversion, affording it to pay out 70% of earnings as a dividend. However, with the confluence of operational weakness due to deferred elective surgeries as a result of the coronavirus, a peak in the capital cycle, and a patent infringement penalty becoming payable, the company faced a liquidity crunch. Consequently, it completed an AUD 850 million equity raise in fiscal 2020, adding an additional 10% to shares on issue and forecast the company to carry no net debt for the foreseeable future. The company is not acquisitive and organic growth is driven by R&D spending of roughly 12% of revenue per year.

Bulls Say

  • There are signs Cochlear is looking to expand beyond the hearing market with the investment in Nyxoah, a company focused on development of a hypoglossal nerve stimulation therapy for the treatment of obstructive sleep apnea.
  • The annuity like revenue stream from sound processor upgrades and accessories is an increasingly important component of the revenue stream.
  • Cochlear earns ROICs well ahead of the cost of capital even in bear-case scenario, which is testament to the high quality of the company.

Company Description

Cochlear is the leading cochlear implant device manufacturer with around 60% global market share. Developed markets contribute 80% of group revenue where cochlear implants are the standard of care for children with severe to profound hearing loss. The company also actively targets the growing cohort of seniors in developed markets. Tender-oriented emerging markets contribute the remaining 20% of group revenue. Main products include cochlear implants, bone-anchored hearing aids, and associated sound processors. In fiscal 2020, 49% of revenue came from the Americas, 35% from Europe, the Middle East, and Africa, and 16% from the Asia-Pacific segment.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Treasury’s volume share gains and positive mix shift support strong enough brand assets

Business Strategy & Outlook

Treasury Wine Estates has increasingly focused on building high-end brands in its portfolio, particularly in luxury (bottles priced above AUD 20) and “masstige” (bottles priced from AUD 10 to AUD 20) wine. With this focus, the company’s revenue from higher-end wines has risen to over 90% in fiscal 2022 from 43% in early 2014, both from growth in its high-end products and purposeful reduction of low-end, or commercial, wine sales. Continued end-market premiumization to benefit Treasury, leading to market share gains in Australasia and North America, which together made nearly half of operating earnings in fiscal 2020. In recent years, global wine consumption has proven sluggish, but high-priced wines have bucked this trend, with luxury and masstige volumes growing at mid- to high-single-digit rates in developed regions such as Australia and the U.S., per company estimates. However, Treasury faced an installation of a sizable tariff against its imported product in China in fiscal 2021, effectively shutting the door in what was arguably Treasury’s most important market, comprising 30% of earnings in fiscal 2020. The company plans to reallocate some of this wine to other markets, but the associated sales and marketing efforts will take time, reducing growth from previous expectations.

Treasury also faces risks from unfavorable weather effects, sensitivity to the consumer cycle, and inelastic industry supply that frequently results in wine gluts or shortages. That said, the diversity of Treasury’s grape and bulk wine supply should significantly mitigate these concerns. And bringing in a significant proportion of its grape and bulk wine from outside suppliers increases the proportion of variable costs and ensures a lower-cost supply in times of surplus. But it cannot be believed Treasury’s volume share gains and positive mix shift support strong enough brand assets to offset industry fragmentation, a proliferation of branded offerings, limited customer switching costs, and potential for changing consumer tastes. As such, despite a strong position in Australia, the company will likely continue to combat competitive pricing and promotional activity globally.

Financial Strengths

Treasury is in good financial health. The firm’s net debt/adjusted EBITDA ratio, including operating leases stood at 1.8 times at June 2022, and EBITDA to cover interest expense (including operating leases) an average of 8 times over the next five years. The company’s next major debt maturity is in fiscal 2024, but there are no issues either relaying or refinancing this payment. At June 2021 the company’s liquidity, comprising cash and undrawn committed debt facilities, was solid at approximately AUD 1.3 billion. Over the long run, there’s probably some room for additional debt, given management’s target of net debt/adjusted EBITDA of 2.0 times through the cycle, potentially stretching to 2.5 times, compared with the low levels today. That said, the company will remain focused on maintaining an investment-grade credit profile. The company aims to pay out 55%-70% of its earnings as dividends; an average of about 65% over the next five years. Treasury can continue to pay out dividends near the top of this range, but anticipate dividends to be only partially franked from fiscal 2025. While Treasury is an Australian taxpayer, the majority of earnings are derived outside Australia, and the available franking credits to be exhausted more quickly than they are replenished over the coming years.

Bulls Say

  • Wine consumption growth in Asia should continue growing at high rates over the long run, and is a high margin business for Treasury given a focus on luxury and mid-range wine. 
  • Treasury’s focus on higher-priced wine than in the past puts the company on-trend in global wine, and should drive substantial earnings growth as profitability expands. 
  • Additions of new high-end wine brands, either organically or through acquisition, drive better grape utilization, improving margins, and higher ROICs.

Company Description

Treasury Wine Estates is an Australia-based global wine company that demerged from Foster’s Group in 2011. The company is among the world’s top five wine producers, and owns a portfolio that includes Australian labels such as Penfolds and Wolf Blass, U.S. wines like Chateau St Jean and Sterling, and newly launched names such as 19 Crimes and Maison de Grand Esprit. An acquisition of Diageo’s wine business in 2016 added additional U.S. brands including BV and Stags’ Leap. Treasury owns over 130 wineries, with more than 13,000 planted hectares.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.