Categories
Commodities Trading Ideas & Charts

Viva is Australia’s second-largest vertically integrated refined transport fuel supplier, delivering over 14.5 billion litres of refined product annually

Business Strategy & Outlook

Viva, along with Ampol, BP and Mobil, is a rare breed of vertically integrated Australian refined fuel supplier. The Australian downstream petroleum industry runs from sourcing, transporting and storing crude oil, refining that crude into marketable products or directly sourcing imported refined product, and then transporting refined products for sale to retail and commercial customers. Refined products are mostly used in the transport sector, including commercial and private motoring, aviation, marine, and other transport demand. The Australian market equates to approximately 60 billion litres of product, with road use the largest segment at over 50%, followed by aviation at 14% and industry at 12%. Coronavirus notwithstanding, volumes in the Australian fuels market grow at close to rates in GDP, with solid increases in diesel and jet fuel consumption offsetting a slow decline in petrol.  There’s a comparatively steady Australian refined fuels demand growth of 1.5% per year.

Viva is Australia’s second-largest vertically integrated refined transport fuel supplier, delivering over 14.5 billion litres of refined product annually or approximately 24% of national requirement. Viva is vertically integrated because it refines, supplies and markets fuel to customers. Few companies refine fuel locally with much of Australia’s refining capacity shut in recent decades, unable to compete with Asian mega-refineries. There are only four refineries remaining including Viva’s Geelong in Victoria. Geelong converts imported and locally sourced crude oil into gasoline, diesel, jet fuel and lubricants. These are then distributed, along with directly imported products, into the retail channel via supply channels. The Geelong refinery is one of the most complex in the country due to its greater ability to produce higher value products. Against the sanguine outlook for the refined fuels industry, there are a number of concerns. These include the potential for heightened competition, driving lower margins given the entrance of new players. Further, investing in older and far smaller refineries than Asian mega-cousins is a potential money pit.

Financial Strengths

First-half net operating cash flow increased 173% to AUD 678 million, with strong cash generation across the segments though inclusive of favorable inventory drawdown. This supports future investment and dividend payments, with the balance sheet moving to an AUD 324 million net cash position at end-June 2022 versus AUD 95 million net debt at end-December 2021. Viva to retain a relatively ungeared balance sheet. Viva intends to buy Coles Express for AUD 300 million in the first half of 2023. The consideration will be funded entirely out of existing cash reserves and debt facilities. Viva is to retain a modestly leveraged balance sheet even after the acquisition, sub-20% gearing and maximum sub-0.5 net debt/EBITDA, assuming a 65% payout ratio. The strong status is despite returning AUD 680 million in aftertax Viva Energy REIT sale proceeds in full to shareholders in 2020 and making a AUD 100 million capital return in 2021. The solid free cash flows in the foreseeable future, growing to over AUD 350 million by 2025, which should comfortably support Viva’s target dividend payout ratio of between 50% and 70% of underlying distributable NPAT.

Bulls Say

  • Viva boasts significant refined fuel distribution, supplying around 24% of Australia’s national requirement; second only to Ampol.
  • Australia’s fuel demand continues to grow at low single digits as population growth and rising aviation use offset increasing vehicle fuel efficiency gains.
  • While not sufficient to warrant awarding an economic moat, Viva’s pipeline and terminal infrastructure furnish competitive advantages–notably the efficient scale with its jet fuel pipeline supplying Sydney Airport.

Company Description

Viva is Australia’s second-largest vertically integrated refined transport fuel supplier. Viva is the second-most-significant pipeline owner, and at approximately 1,155 locations, Viva supplies the third-largest number of retail sites in Australia behind Ampol at approximately 1,985 and BP at 1,400. Vitol bought Shell’s Australian downstream operations in 2014, and renamed them Viva Energy. Viva subsequently bought Shell’s Australian aviation operations and a 50% investment in Liberty Oil. In 2016, Viva sold (and leased back) a portfolio of its retail sites to Viva Energy REIT and listed Viva Energy REIT on the ASX. It has since sold its entire REIT stake for AUD 734 million.

(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.

Categories
Global stocks

Qantas Frequent Flyer is essentially a capital-light business attached to a capital-intensive flying business

Business Strategy & Outlook

The COVID-19 pandemic has wreaked havoc on the global airline industry. Lockdowns, border restrictions, and social distancing measures have clipped Qantas’ wings. Stringent Australian entry requirements for international arrivals and an effective ban on noncitizen, nonpermanent resident arrivals decimated passenger revenue, and despite aggressive cost-cutting, operating deleverage led to significant after-tax losses in 2021 and 2022. Qantas remains well-positioned to participate in the recovery as skies gradually reopen. A continued easing of international border restrictions will lead to a boon in tourism. The domestic business, of which Qantas typically captures around two thirds market share, to exceed pre-COVID-19 levels around fiscal 2023. The international recovery is to be more gradual. Prior to the international border reopening in February 2022, Qantas’ international business was virtually grounded. While there is room for optimism over loosening restrictions and pent-up demand, it is believed the recovery will prove protracted, and expect Qantas’ international flying business to exceed pre-COVID-19 levels around fiscal 2024.

The Qantas’ loyalty program, Qantas Frequent Flyer, to some extent cushion earnings volatility in the flying business. Despite a lack of flying activity, the loyalty business is to remain profitable and deliver stable cash flows. Qantas Frequent Flyer is essentially a capital-light business attached to a capital-intensive flying business. Consumers want to earn loyalty points when they fly, and status benefits are important to corporate passengers. The program generates earnings from the sale of points to hundreds of partners, including banks, supermarkets, telephone companies, and department stores. This offers more ways to redeem and earn points, attracting more customers, which in turn attracts new partners–a network effect but not enough to warrant a moat for the group.

Financial Strengths

Qantas’ balance sheet is in a strong position, bolstered by an equity raising in June 2020. While the dilutive impact of the raising has negative consequences for shareholder value, the additional capital positions the company in a comfortable position to navigate near-term challenges. Qantas boasts a cash balance of AUD 3.3 billion at the end of June 2022, a debt book with no covenants, and a further AUD 1.3 billion in undrawn facilities. Qantas has aggressively cut operating costs to weather the coronavirus storm, targeting AUD 15 billion in cost savings over the three years to fiscal 2023–largely temporary savings in rightsizing and operating costs amid a lack of flying activity. Qantas’ freight and loyalty have also cushioned earnings volatility. There’s a return to profitability and a reinstatement of dividends in late-fiscal 2023.

Bulls Say

  • Qantas’ earnings are highly leveraged to improving macroeconomic conditions and unrestricted air travel.
  • The two-brand Qantas and Jetstar strategy provides flexibility to align capacity and costs with prevailing demand and economic conditions, without affecting the Qantas brand and service perception.
  • The Qantas Frequent Flyer program continues to deliver strong earnings and cash flow, underpinning dominant domestic market share.   

Company Description

Qantas Airways is Australia’s largest domestic airline with typically a two thirds market share, effectively competing in a duopoly with Virgin. The company operates a multibrand strategy, with low-cost carrier Jetstar complementing the full-service Qantas brand. Its frequent-flyer loyalty program continues to expand with new partnerships, which are integral to retaining customer loyalty for its core airline business.

(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.

Categories
Global stocks Shares

News Corporation is better placed than peers in the publishing space to transition its print business to the digital age

Business Strategy & Outlook

News Corp operates in an industry undergoing significant changes, with the traditional print-based publishing business model being dismantled by proliferating news and information outlets in the digital space. This is compounded by ever improving means for consumers to access them, driven by mobility and continuing device innovation. Consequently, News Corporation faces enormous structural headwinds, with consumers migrating from newspapers to the digital arena and advertisers following suit. Having said that, News Corporation is better placed than peers in the publishing space to transition its print business to the digital age. It has some of the most venerable masthead brands in the industry (The Wall Street Journal, The Times), and boasts significant editorial resources, especially compared with those of its rivals, which have been dwindling. The company’s financial position is solid, having split in 2013 from Twenty-First Century Fox, with no debt on the balance sheet. Even with the recent consolidation of Foxtel’s debt and a string of acquisitions, News boasts sufficient financial strength to transition the business to the digital age while also exploring opportunities to diversify away from the traditional newspaper business. Recent efforts to simplify the group are also positive, while a USD 1 billion buyback was announced in August 2021. 

While News Corporation deals with the structural challenges facing its publishing business, the company was partly shielded by its Australian pay-television operations in 65%-owned Fox Sports and Foxtel. Unfortunately, these two businesses are also coming under severe pressure from digital streaming alternatives to pay TV. On the positive side, the 61%-owned REA Group’s growth outlook remains robust in the online real estate classifieds space and the Move (acquired in November 2014) is making strong progress in the U.S. digital property

Financial Strengths

News Corporation is in solid financial health. It currently has a net debt position of just USD 1.2 billion, or 0.7 times EBITDA. Furthermore, the legacy newspaper publishing business is still generating solid free cash flow, albeit at a declining rate, augmented by resilient earnings from REA Group. Consequently, the company is well placed financially as it attempts to transition the publishing business model to the digital age, while also exploring opportunities to diversify away from it. In November 2021, management began a share buyback. Even after closing several acquisitions in 2022, News can repurchase up to USD 1 billion worth of shares and still keep net debt/EBITDA below 1.5. However, the last time News instituted a buyback in 2013 due to a “lazy” balance sheet, it only repurchased 14% of the USD 500 million program, even though the stock price was much lower during that time.

Bulls Say

  • News Corporation’s strong financial position and still-solid free cash generation separate the company from its s
  • The solid balance sheet provides management with critical flexibility, as it attempts to navigate the treacherous
  • News Corporation also boasts a number of resilient online property classified assets in Australia and the U.S., ones that add to its cash flow profile and provide a template for the kind of businesses that management wishes to acquire as part of a diversification strategy.

Company Description

News Corporation is a diversified media conglomerate with a large presence in the U.S, the U.K., and Australia. Key brands include The Wall Street Journal, Herald Sun, and The Times. The company also has a strong presence in the Australian pay-TV market through Fox Sports and Foxtel (both 65%- owned), while its 62%-owned REA Group is the dominant real estate classified business in Australia. In addition, it owns HarperCollins, one of the largest book publishers globally, and also has a substantial digital property advertising business (Move) in the U.S.

(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.

Categories
Property

The quality of Kilroy’s portfolio is evident from the fact that its average age is just 11 years compared with 30 years for peers

Business Strategy & Outlook

Kilroy Realty is a REIT that owns, develops, acquires, and manages premier office, life science, and mixed-use real estate properties in Los Angeles, San Diego, San Francisco Bay Area, Seattle, and Austin. It owns over 115 properties consisting of approximately 15 million square feet. The company has positioned itself to benefit from the burgeoning life sciences sector with material exposure in its current portfolio and future development pipeline. Management’s focus on ESG as it aligns its office portfolio to meet the sustainability requirements of its clients is impressive. Kilroy’s management has been able to successfully time the boom in technological employment occurring in the largest metropolitan areas along the West Coast. The company’s strategy is to achieve long-term sustainable growth by developing and owning the highest quality real estate in technology and life science market clusters. The quality of their portfolio is evident from the fact that its average age is just 11 years compared with 30 years for peers. Economic uncertainty emanating from pandemic recovery and the remote work dynamic created a challenging environment for office owners. Employees are still hesitant at returning to the office as office utilization remains around 45% of the pre-pandemic level. The vacancy rates in Los Angeles and San Francisco office markets were recorded at 20.8% and 21.9% respectively in first-quarter 2022. 

The current vacancy rate in both these cities is substantially higher than the vacancy rates during the height of the global financial crisis. The net absorption rate in West Coast markets remains negative to marginally positive as of first-quarter 2022 and rental growth figures are disappointing especially given the inflationary environment. Having said this, there’s an increasing number of companies requiring their employees to return to the office. In the long run, remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centerpiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.

Financial Strengths

Kilroy Realty is in sound financial health. The company’s total debt was $4.1 billion as of the end of the first quarter in 2022, resulting in a debt/EBITDA ratio of 6.6 times. It can be pointed out that the debt/EBITDA ratio should trend lower over the next few years as fundamentals recover and EBITDA sees healthy growth. The weighted average interest rate on the company’s debt was 3.70% and the weighted average maturity period was 7.0 years. The maturity schedule of the company’s debt shows that there are no major debt maturities until the end of 2024 and the maturities are adequately spread. In an increasing interest rate environment 100% of the company’s debt is fixed-rate debt. The leverage used by the company to fund its capital structure is appropriate given the high-quality office portfolio. The fixed-charge coverage ratio, which is a ratio of EBITDA divided by all fixed expenses (including interest expenses), was 3.5 times and the interest coverage ratio was 8.4 times as of the end of the first quarter of 2022. As a real estate investment trust, Kilroy Realty is required to pay out at least 90% of its income as dividends to shareholders. The FAD payout ratio which is a ratio of dividends to funds available for distribution was reported at 67.0% for the year 2021. This shows that the company is generating sufficient cash to cover its fixed expenses and payout dividends. The company is also in a comfortable position with respect to liquidity as it has a robust liquidity position of around $1.4 billion including the cash on the balance sheet and the revolving credit facility. This gives the firm enough flexibility to fund its operations, pay dividends, pursue inorganic growth, and invest in organic development opportunities.

Bulls Say

  • Kilroy’s focus on technology and life science market clusters should benefit the firm in the long run as there’s buoyant growth in these areas. In addition to this, the company’s high-quality office buildings with good amenities should benefit from the flight to quality trend.
  • Kilroy’s management team has demonstrated that it is able to successfully recycle capital and pursue growth over the past business cycle.
  • Regulatory barriers to construction in West Coast cities such as Los Angeles and San Francisco mean Kilroy will continue to benefit from muted supply.    

Company Description

Kilroy Realty is a premier owner and landlord of approximately 15 million square feet of office space across Los Angeles, San Diego, the San Francisco Bay Area, and greater Seattle. The company operates as a real estate investment trust.

(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.