Tag: Australian Market

• Exposure to the growth of both developed and emerging economies.
• Headwinds in the near term should be factored into the price.
• Following a recent strategic assessment, the strategy has been revised.
• Bolt-on acquisitions (and the synergies that come with them) can help complement organic growth.
• Leveraged against the AUD/USD and is now declining.
• Corporate activities that could occur.
• Management of capital (current on-market share buyback plus potential for additional initiatives).

Key Risks

• Margin loss due to competitive forces.
• Cost pressures in the supply chain that the company is unable to pass on to customers.
• Economic conditions in the United States, emerging markets, and Australia are deteriorating.
• Risk associated with emerging markets.
• Adverse Movements in AUD/USD exchange rates 
• OCC prices are decreasing.

FY21 group result highlights

Group revenue was slightly down (-0.8 percent) to $3.5 billion (up +7.8% in constant currency), operating earnings (EBIT) were up +11.6 percent to $249.1 million (up +17.3 percent in CC), underlying NPAT was up +23.7 percent to $156.7 million, EPS was up +29 percent to 16.9 cents (also driven by the on-market share buyback), and the full year dividend of 14cps up +16.7% on pcp. 2) Balance sheet. The impact of the on-market share buyback boosted leverage from 0.9x to 1.5x. Leverage, on the other hand, is still far below management’s goal range of 2 – 2.5x.

Company Description 

Orora Limited (ORA) provides packaging products and services. Orora is a global packaging manufacturer, distributor and visual communication solutions company The Company offers fibres, and glass and beverage can be packaged materials in Australia and Asia and packaging distribution services in North America and Australia.   

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.

Cochlear implants became the standard of care many years ago for children in developed markets with profound hearing loss or deafness. 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. 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 from over 80 years of age. However, hearing aids, not cochlear implants, are the standard of care. Cochlear is investing significantly to grow awareness as well as funding research to support pay or reimbursement.

Financial Strength

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 we 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.

Wide-moat Cochlear’s fiscal 2021 underlying NPAT rebounded 54% to AUD 237 million following the resumption of elective surgeries. As vaccination rates increase, the firm anticipates a continued recovery and provided fiscal 2022 NPAT guidance of AUD 265 million-285 million. The guidance is based on a USD/AUD exchange rate of 0.74 and doesn’t factor in material disruption from COVID-19. Our fair value increases by 9% to AUD 175, driven by our forecast 0.72 USD/AUD exchange rate from 0.77 prior. We also decreased our long-term assumptions for the tax rate and R&D investment as a percentage of sales to 25% and 12%, respectively, from 27% and 13% prior. 

Fiscal 2021 implant sales grew 19% constant-currency on 15% growth in unit sales. Despite a much stronger USD, our revised fiscal 2022 revenue forecast of AUD 1,627 million implies just 9% growth on fiscal 2021. Shares still screen as overvalued with our forecast five-year revenue growth of 9% unchanged. Cochlear declared a final dividend of AUD 1.40 per share with full-year dividends representing a 71% dividend payout on underlying NPAT but unfranked as a result of fiscal 2020 losses.

Bulls Say’s 

• Continued strong top-line growth is likely to be more challenging and dependent on growing penetration in emerging markets and adults in developed markets.
• The more reliable annuitylike revenue stream from sound processor upgrades is forecast to contribute an increasingly larger proportion of group earnings as it is driven by a growing installed base.
• The company enjoys low capital intensity and high gross margins and cash conversion, enabling Cochlear to afford a 70% dividend payout ratio in a typical year.

Company Profile 

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, or BAHA, and associated sound processors. In fiscal 2020, 49% of revenue came from the Americas, 35% from EMEA, and 16% from the Asia-Pacific segment.

(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.

Handbags and some types of apparel have been selling well as economies in the U.S. and greater China have recovered. We think Tapestry has good momentum as it enters fiscal 2022, so we expect to lift our per share fair value estimate of $43.50 by a mid-single-digit percentage. Tapestry is one of the few firms in the apparel and accessories space that we currently view as undervalued, especially after its share price slid 3% after the earnings report.

Against an easy comparison, Tapestry reported constant currency sales growth of 122% in the quarter, eclipsing our 118% estimate. More importantly, its sales rose 7% as compared with 2019, with most of the growth attributable to Coach. The Coach brand is the source of our narrow moat rating on Tapestry, and we think it is healthy enough to hold segment operating margins of 29%-30% in the long term. Meanwhile, we see signs of progress at both Kate Spade and Stuart Weitzman, although neither has significant growth from two years ago. We model sales growth rates of 5%-6% for these brands in the long run based on improved product and consumer engagement under the Acceleration Program.

Tapestry’s quarterly adjusted operating margin of 16.9% came in 40 basis points above our 16.5% forecast. As targeted by the Acceleration Program, the firm achieved the $200 million in gross expense savings in fiscal 2021 and expects to achieve $300 million in additional savings this year. These cost savings are somewhat offset by intended increases in marketing and e-commerce investment, which we view as prudent given the rising demand in China and elsewhere and ongoing e-commerce growth (55% for Coach in the fourth quarter).

Tapestry guided to fiscal 2022 EPS of $3.30-$3.35 on $6.4 billion in sales, above our forecast of $3.23 in EPS on $6.1 billion in sales. We think Tapestry’s outlook is achievable based on current momentum in the business. As its business has rebounded nicely from the pandemic, Tapestry has reinstated its dividend and plans to resume share repurchases. It intends to pay a dividend of $1 per share in fiscal 2022. It also guided to $500 million in repurchases in fiscal 2022, which would be its most since before the 2017 Kate Spade deal. We have a favourable view of this buyback plan as Tapestry trades below our fair value estimate and has a reasonable valuation (forward P/E of about 12). Meanwhile, we think Tapestry may look for another large acquisition in the future. The firm’s new CEO, Scott Roe, has considerable experience with acquisitions from his time at narrow-moat VF. Our capital allocation rating on Tapestry is Standard.

Company Profile

Coach, Kate Spade, and Stuart Weitzman are the fashion and accessory brands that comprise Tapestry. The firm’s products are sold through about 1,500 company-operated stores, wholesale channels, and e-commerce in North America (62% of fiscal 2020 sales), Europe, Asia (32% of fiscal 2020 sales), and elsewhere. Coach (71% of fiscal 2020 sales) is best known for affordable luxury leather products. Kate Spade (23% of fiscal 2020 sales) is known for colourful patterns and graphics. Women’s handbags and accessories produced 68% of Tapestry’s sales in fiscal 2020. Stuart Weitzman, Tapestry’s smallest brand, generates nearly all (98%) of its revenue from women’s footwear.

(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.

• BBN has the largest presence in Australia amongst specialty baby goods retailers.
• Low risk that online sales threaten high service business model of brick-and- mortar stores to showcase goods and in-store advice.
• Solid growth story via new store openings (targeting 100+ stores network).
• Strong market shares (currently sits at 30% in a highly fragmented market).
• NZ’s $450m addressable market represents another opportunity.

Key Risks

• Retail environment and general economic conditions in addressable markets may deteriorate.
• Competition may intensify especially from online retailers such as Amazon, specialty retailers, department stores, and discounted department stores.
• Customer buying habits/trends may change. Rapid changes in customer buying habits and preferences may make it difficult for the Company to keep up with and respond to customer demands.
• Higher operating and occupancy costs. Any increase in operating costs especially labour costs will affect the Company’s profitability.
• Poor inventory control and product sourcing may be disrupted.
• Management performance risks such as poor execution of store rollout especially into ex-metro areas.

FY21 result highlights

Sales of $468.4m were up +15.6%, with same-store comparable sales up +11.3%. Online sales grew by +54.2% and now make up 19.4% of total sales (vs. 14.5% in PCP). Gross profit of $173.7m was up +18.3% on PCP, with GP margin up +83bps to 37.1%. Cost of doing business (CODB) as a percentage of sales improved 14bps to 27.8%, aided by store expense leverage and warehouse volume leverage (cost fractionalization). Operating earnings (EBITDA) were up +29.2% to $43.5m (with EBITDA margin up +100bps to 9.3%) and NPAT was up +34.8% to $26.0m.Operating cash flow was weaker versus pcp, driven by higher working capital – driven by an increase in inventories and also cycling particularly low levels in the pcp. 

 The Company declared a final dividend of 8.3cps, taking the full year dividend to 14.1cps (up +34.1% on PCP). The Board continues to target a payout ratio in the range of 70-100% pro forma NPAT. Private label sales were up +31.1% vs pcp and now make up 41.4% of group sales (vs. 36.5% in FY20). The Company remains on target to achieve 50%of sales from private sales. Outlook guidance: Similar to last year, no earnings guidance was provided for FY22 due to Covid-19 related uncertainty. However, year-to-date trading update suggest the Company is feeling the impacts of the current lockdowns – comparable store sales are down -6.4% YTD (impacted by stay at home orders), online sales are up a healthy +32.6% however much lower than pcp and excluding the most impacted state (NSW) comparable sales are up a subdued +1.0%.

Company Description

Baby Bunting Group Limited (BBN) is Australia’s largest nursery retailer and one- stop-baby shop with 42 stores across Australia. The company is a specialist retailer catering to parents with children from newborn to 3 years of age. Products include Prams, Car Seats, Carriers, Furniture, Nursery, and Safety, Baby wear, Manchester, Changing, Toys, Feeding and others.

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.