Tag: Australian Market
Business Strategy and Outlook:
In 1994, Westinghouse Electrical sold its electrical distribution business, Westinghouse Electric Supply, or Wesco, to a private equity firm. Wesco went public in 1999. Since its separation from Westinghouse, Wesco has used most of its cumulative free cash flow on acquisitions, which have expanded its scale, diversified revenue, and fuelled a meaningful portion of the company’s growth. Wesco now serves a much broader array of customers across industrial, construction, utility, commercial, institutional, and government markets. Wesco operates in very fragmented markets, but its large scale, global footprint, expansive product portfolio and supplier base, and service offerings differentiate it from smaller local and regional competitors. Service offerings, such as vendor-managed inventory, efficiency assessments, product repairs, and training, generate a meaningful portion of Wesco’s sales and are key components of the firm’s value proposition to customers.
Wesco doubled in size after it completed its acquisition of close peer Anixter in June 2020. We expect the merger to be value-accretive to Wesco’s shareholders. Management is targeting $315 million of cost synergies and $600 million of cross-sales synergies by 2023, which we think is achievable. A combination of factors, including normalizing industrial demand and pricing, the Anixter acquisition, and a continued trend of customers consolidating their spending with larger distributors, will provide ample opportunity for Wesco to gain market share and grow faster than its end markets. Improving gross profit margin performance due to price increases and internal initiatives should also support better profit margins.
Financial Strength:
Wesco’s $4.7 billion acquisition of close peer Anixter International in June 2020 caused the firm’s net debt/EBITDA ratio (excluding synergies) to swell to 5.7. Wesco’s elevated free cash flow generation in 2020 allowed the firm to reduce net debt by $389 million, finishing 2020 with a 5.3 net leverage ratio. At the end of 2021, Wesco had $4.7 billion of debt, but we’re modelling about $4.2 billion of free cash flow over the next five years. As such, management’s goal of reducing its leverage ratio to 2-3.5 by the second half of 2022 is very achievable. Wesco has a proven ability to generate free cash flow throughout the cycle. Indeed, it has generated positive free cash flow (defined as operating cash flow less capital expenditures) every year since its 1999 initial public offering, and its free cash flow generation tends to spike during downturns due to reduced working capital requirements. Given the consistent free cash flow generation, Wesco’s financial health is satisfactory.
Bulls Say’s:
- Wesco’s transformative acquisition of Anixter should result in stronger growth and profitability, which should help the stock fetch a higher multiple.
- Wesco’s global footprint and focus on value-added inventory management services help the firm take market share from smaller distributors and support pricing power
- Despite serving cyclical end markets, Wesco’s business model generates strong free cash flow throughout the cycle. The firm will likely continue to use its cash flow to fund organic growth initiatives, acquisitions, and share repurchases.
Company Profile:
Wesco International is a value-added industrial distributor that has three reportable segments, electrical and electronic solutions, communications and security solutions, and utility and broadband solutions. The company offers more than 1.5 million products to its 125,000 active customers through a distribution network of 800 branches, warehouses, and sales offices, including 42 distribution centers. Wesco generates 75% of its sales in the United States, but it has a global reach, with operations in 50 other countries.
(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.
Investment Thesis:
- Strong FY22 earnings guidance momentum as CSL continues to see strong demand.
- Seqirus flu business which recorded its first year of positive earnings (EBIT) in FY18 and continues to perform well.
- Strong demand for their portfolio of products.
- High barriers to entry in establishing expertise + global channels + operations/facilities/assets.
- Strong management team and operational capabilities.
- Leveraged to a falling dollar.
Key Risks:
- Competitive pressures.
- Product recall / core Behring business disappoints.
- Growth disappoints (underperform company guidance).
- Turnaround in Seqirus flu business stalls or deteriorates.
- Adverse currency movements (AUD, EUR, USD)
Key highlights:
- CSL Ltd (CSL) 1H22 results came in ahead of expectations. Net earnings (NPAT) of $1.76bn, down -3%, or -5% on a constant currency (CC) basis.
- Revenue of $6,041m was up +4%. EBIT of $2,215m, was -8% weaker.
- Margins of 36.7% was down from 41.1% in the pcp.
- NPAT of $1.76bn, down -5% (Constant Currency, CC) and likewise, earnings per share $3.77, down -5%, despite revenue up +4% (CC) driven by strong growth CSL’s market leading haemophilia B product IDELVION and specialty products KCENTRA and HAEGARDA.
- CSL Behring: Total sales of $4,356 was flat, whilst EBIT of $1,331, was -22% weaker
- Immunoglobulins: sales of $1,977m was down -9% with management pointing to supply tightness temporarily impacting growth.
- Albumin: sales of $571m was up +1% due to competitive pressures in the EU as local manufacturers compete for volume and as CSL saw a decline in US as supply constraints stem from plasma collections.
- Haemophilia: sales of $587m was up +5% with sales in recombinants of $372m, up +12% offset by plasma sales, $215m, down -6%.
- Specialty: sales of $914m was up +2% despite sales in peri-operative bleeding of $465m, up +8%.
- Seqirus: revenue of $1,685m was up +17% as seasonal influenza vaccine sales were up +20% and CSL achieved a record volume ~110m doses in the northern hemisphere
Company Description:
CSL Limited (CSL) develops, manufactures and markets human pharmaceutical and diagnostic products from human plasma. The company’s products include pediatric and adult vaccines, infection, pain medicine, skin disorder remedies, anti-venoms, anticoagulants and immunoglobulins. These products are non-discretionary life-saving products.
(Source: Banyantree)
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.
BetaShares FTSE RAFI Australia 200 ETF QOZ offers distinctive exposure to Australian equities based on a fundamental index. QOZ aims to track the FTSE RAFI Australia 200 Index before fees and expenses. Conforming to a contrarian methodology, the index construction is driven by a four-factor method developed by US-based Research Affiliates. The five-year average of the four metrics (book value, sales, cash flow, and dividend) are used to build a portfolio with reliable but currently undervalued stocks.
Approach
QOZ aims to track the FTSE RAFI Australia 200 Index before fees and expenses. This index eliminates the traditional market-cap-weighted index approach where portfolio weight depends on share price. Instead, QOZ favours stocks with a larger “economic footprint.” The index comprises the top 200 companies listed on the ASX, as measured by four equally weighted fundamental measures: sales, cash flow, dividends, and book value. Five-year averages are used for the first three factors, with the latest available book value applied. Stocks are weighted based upon an equally weighted composite score of these four metrics.
Portfolio
Market-cap-weighted Australian equity benchmarks are dominated by large sectors and companies. A handful of very large financial services and materials companies compose a significant slice of the overall pie. QOZ shares these characteristics, but instead of weighting by market cap, it uses an index based on fundamental metrics in which stocks with bigger economic footprints (earnings, sales, dividends, and book value) receive more prominence.
Performance
Value-titled strategies have faced difficult times over the past decade. The returns have been typically overshadowed by the conventional growth-oriented strategies. However, it should be noted that such factor skews undergo cycles and may see an upturn when the macroeconomic environment changes. As at December 2021, QOZ delivered an annualised five-year return of 8.2% against the S&P/ASX 200’s 9.8%. The year 2016 was a period of contrasting halves as valuations dipped in the first half and quickly raced back and beyond in the latter half. The fund significantly outperformed the broader index over this period, delivering returns of 18.3%. The rally continued in 2017, and the fund ended with over 11.3% returns during the year. In 2018, US-China trade wars surfaced, causing global unrest in the equity markets. As such, the fund witnessed a sharp drawdown in the year’s final quarter.
Company Profile
Cimic is Australia’s largest contractor, providing engineering, construction, contract mining services to the infrastructure, mining, energy, and property sectors. The business structure consists of construction, contract mining, public-private partnerships, and property, along with 45%-owned Habtoor Leighton. Cimic has exited its Middle East business. ACS/Hochtief owns 76% of Cimic.
(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.
Business Strategy and Outlook
Unibail-Rodamco-Westfield or URW, was formed in 1968, and it acquired several large malls through to 1995, and offices thereafter. In 2000 it launched a conventions and exhibitions business and is now the European leader in that sector. In 2007 Unibail merged with Rodamco, becoming the largest retail REIT in continental Europe. The group expanded into the United Kingdom and United States via the acquisition of Westfield in 2018.
The Westfield acquisition was via a combination of cash and scrip, and management committed to noncore asset sales to reduce debt. Progress was good until the COVID crisis crimped its previous earnings certainty, and market sentiment toward URW. The group’s assets remain high quality, owning centres that are among the best in Europe and the United States. Its iconic assets include the Carrousel du Louvre in Paris, Westfield Mall of Scandinavia in Stockholm, Westfield centres at Stratford and Shepherd’s Bush in London, the Westfield World Trade Centre in New York, Westfield Valley Fair in the San Francisco region, and many others. It is foreseenURW’s malls to perform strongly once economic conditions return to approximately normal. However, URW’s large debt load combined with an earnings hole of unknown duration has put the balance sheet under pressure.
URW was able to issue debt during the COVID crisis at cheap prices (albeit slightly higher than 2019 levels), but needs to reduce debt. In November 2020, shareholders rejected a proposed EUR 3.5 billion equity raising. URW may instead exit its more than EUR 10 billion of assets in North America, sell more than EUR 2 billion of assets in Europe, pay no distributions until 2023, and cut development spend. Given the fast-changing landscape, it wouldn’t be of surprise to see further adjustments to the strategy, with management taking an opportunistic approach, with options including full or partial asset sales, development partnerships.
Financial Strength
URW is under financial pressure due to its high debt load combined with a hole in its earnings from coronavirus shutdowns, social distancing, and related economic damage. Its loan to valuation ratio of 42.5% (pro forma, as at Dec. 31, 2021) is excessive in Analysts’ view. A proposed EUR 3.5 billion equity raising was rejected by shareholders in November 2020, URW instead raising cash through European asset sales over 2021 and 2022, and potentially EUR 10 billion of sales in North America. It is assumed the capital proceeds will be used to repay debt, and are confident gearing can be brought under 35%, however, to go much lower than that will require favourable conditions for asset sales, which could take time. If the economy approaches normal conditions and other planned cash collection/retention measures proceed, the company should be on a firmer footing. However, if COVID-19 variants result in consumer aversion to public places well into 2022, it is possible URW would have to raise equity again. In the event of dangerous new variants that require longer restrictions on retail trading, there is a remote risk this could completely wipe out current securityholders, though this would be an extreme scenario. A prolonged rise in interest rates is also a risk, though URW’s long-dated debt profile and leases linked to CPI and tenant sales provide some protection from this.
Bulls Say’s
- COVID-19 vaccine rollouts, and the milder omicron virus variant, should help URW’s rents and asset sales in coming years.
- URW tenants have recovered to sales numbers near pre-COVID-19 levels. Though not maintained, this suggests that rents should eventually recover to preCOVID-19 levels once pandemic issues are in the past.
- Although e-commerce competition is intense, a lot of the damage has already been done. URW’s affluent catchments remain desirable for retailers, who require a physical presence to maintain their brand and customer service standards.
Company Profile
Unibail-Rodamco-Westfield, or URW, owns a portfolio of quality malls, about two thirds in continental Europe. Since acquiring Westfield in 2018 URW also has about 10% in the U.K. and about 25% in the U.S., but it plans to drastically reduce exposure to the latter. More than 90% of rent comes from shopping centres, the remainder from offices, mostly Paris, as well as some offices attached to mixed-use assets around the world, and a similar amount from a conventions and exhibitions business in France.
(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.
Western Asset Australian Bond is a compelling choice for domestic fixed-interest exposure owing to its bestin-class team and straightforward approach. Anthony Kirkham, head of investment/portfolio manager, is the leader of this strategy, and we have high regard for his investment knowledge and skills.
Approach
The philosophy of the team is to identify mispricings within sectors and securities allocating active risk in areas in which it has conviction while ensuring the portfolio remains diversified to avoid singular themes being pervasive through the portfolio. The team takes account of global macro insight from the global investment strategy committee and overlays its domestic market knowledge to come up with a base-case expectation looking forward six to nine months depending upon their conviction. In addition to this, the team develops multiple upside and downside scenarios as a risk-management framework.
Portfolio
The portfolio can invest across government, semi-government, supranational, credit, securitised assets, inflation-linked bonds, and cash. As of November 2021, over 40% of the portfolio was invested in investment grade corporate bonds, around 25% in semi-government issues, 20% in government, 10% in supranational, with a small amount of mortgage-backed and asset-backed securities. Active duration moved short relative to the benchmark around mid-2021 but came back in line with the index around year-end. Similar to most Australian bond managers, they entered 2021 overweight in credit, indicative of their opportunistic profile.
People
The fund is managed by a seasoned team of investors who remain dedicated to this strategy. The team is led by Anthony Kirkham, who has had more than 30 years of wider experience, including nearly two decades at Western Asset Management and leading this strategy since 2002. Kirkham has credit analyst, dealer, and portfolio manager experience working for Commonwealth Bank, Metway Bank, RACV Investments, and Citigroup. He is supported by Damon Shinnick, who is a portfolio manager with a focus on credit portfolios.
Performance
This strategy has performed well over the medium and long term, especially compared with peers. It has delivered returns above the Bloomberg AusBond Composite Index, net of fees, over the past decade. That is ahead of its target return of 75 basis points (gross of fees) over the benchmark and market cycle. A tracking error of 100 basis points is targeted. Perhaps more impressive, though, is that these results put the strategy’s flagship A share class in the first quartile of its Morningstar Category over the trailing three, five, and 10 years to December 2021. Sector allocations and credit exposure continue to drive performance.
(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.
Business Strategy and Outlook
Seek captures 90% of total time spent online searching for jobs, dominating the Australian market. This dominance within a small niche global geographic market, built through a first-mover advantage, represents a strong competitive advantage given its network effect. Australians view seek.com.au as their first port of call for looking for employment, which is why we ascribe a narrow moat to the company.
Seek’s international investments offer strong growth potential. Through a close working relationship with investment group Tiger Fund, Seek has acquired minority shareholdings in the number-one online job sites in Brazil, Mexico, Indonesia, Thailand, Malaysia, the Philippines, and China. Low Internet penetration is a common feature among these countries while gross domestic product growth rates remain comparatively high. The Chinese investment, Zhaopin, is of particular interest, as funds continue to be reinvested back into further establishing its growing online market share. Internet data indicates that Zhaopin and rival 51Job continue to trade the desired number-one market position back and forth from month to month. Morningstar analysts view Seek as an entrepreneurial organisation that is unafraid to create new concepts and push the boundaries in offering a range of new services within education and job-seeking to an online market that is rapidly evolving, compared with traditional business models.
Morningstar analysts have increased our fair value estimate for narrow-moat rated Seek by 8% to AUD 21.50 per share following its stronger than expected first-half financial result. The strong result partly reflects the currently tight job market in Australia but also more maintainable improvements, such as higher revenue per advertisement. The fair value increase reflects a combination of the time value of money boost to our financial model and higher earnings forecasts. For example, we’ve increased our revenue CAGR for the “core” ANZ business to 11% from 8% over the next decade and increased its average EBITDA margin to 63% from 62% over this period.
Financial Strength
Morningstar analysts have increased our fair value estimate for narrow-moat rated Seek by 8% to AUD 21.50 per share following its stronger than expected first-half financial result. The strong result partly reflects the currently tight job market in Australia but also more maintainable improvements, such as higher revenue per advertisement. The fair value increase reflects a combination of the time value of money boost to our financial model and higher earnings forecasts. For example, we’ve increased our revenue CAGR for the “core” ANZ business to 11% from 8% over the next decade and increased its average EBITDA margin to 63% from 62% over this period.
Bulls Say
- Seek has a dominant position in the Australian market underpinned by a network effect-based economic moat. This enables strong cash generation to fund other overseas businesses.
- Seek has successfully diversified beyond its core Australian business to build a global online employment marketing group.
- The network effect, epitomised by successful online market Titans such as Google, eBay, and Facebook, demonstrates the virtuous circle of the largest audiences attracting more and more users because of audience size.
Company Profile
Seek operates the dominant Australian online job advertising website, capturing 90% of time spent online looking for jobs. It also has an education division that provides vocational courses online. Overseas investments provide Seek with market-leading positions in the online jobs market in Asia and Latin America.
(Source: Morningstar)
- Relative to the pcp: (1)
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.