Tag: Australian Market

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Global stocks

Vocus Group Ltd

M2, on the other hand, is an infrastructure-lite but sales force-heavy consumer-focused telecom entity. Its stellar growth has also been driven by many acquisitions.

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

  • Vocus’ extensive fibre network infrastructure has the potential to materially lift the company’s share of the corporate and small business telecommunications markets.
  • Vocus’ Australian retail unit faces margin pressure in the National Broadband Network, or NBN, era.
  • Vocus is well and truly past the “fix and repair” stage, and is on the “shed and grow” phase of its journey, with network services clearly identified as its core unit longer term.

Vocus’ Scheme of Arrangement with MIRA/Aware Super Consortium

We recommend shareholders of Vocus vote in favour of the proposed scheme of arrangement with Voyage, a vehicle owned 50/50 by Macquarie Infrastructure and Real Assets Holdings, or MIRA, and Aware Super. The recommendation is based on the following reasons. First, there have not been any competing interests for Vocus since MIRA’s AUD 5.50 offer was first proposed on Feb. 8, 2021. No left-field utility companies have come along with visions of “bundled plays”, and no right-field upstarts have come along with “funny paper” hoping to turn it into hard assets (as is occurring in other sectors).

In fact, the Vocus board is fully on board with the scheme, at least 15.6% of the voting interests are in the bag (Janchor with 9.3%, MIRA/Aware Super with 6.3%), and we do not see any reasons for other major institutional shareholders to dissent. Second, as pointed out in our prior research, MIRA/Aware Super’s AUD 5.50 per share offer is generous. It is at a significant premium to our AUD 3.50 stand-alone assessment for Vocus, and represents a ritzy 12.7 times underlying EBITDA for the past 12 months, or 11.6 our forecast fiscal 2021 EBITDA. The independent expert’s report, unsurprisingly, also agrees, declaring the offer to be within its AUD 4.98 and AUD 5.60 valuation range. Third, Vocus shareholders should cherish the straightforward, uncomplicated nature of the high-premium bid.

It is AUD 5.50 per share in cold, hard cash right now, as opposed to remaining as shareholders of a listed entity competing in the turbulent and NBN-infested waters of the telecom industry, with no certainty as to when or if Vocus’ value may ever exceed AUD 5.50 in the future.

Bulls Say

  • Vocus owns and operates an extensive fibre network that drives attractive economics in its fibre and Ethernet business and provides a durable competitive advantage.
  • The marriage of Vocus’ infrastructure and M2’s strong sales force has the potential to materially lift the company’s share of both the corporate and the small business markets.
  • Vocus’ presence in the New Zealand telecommunications market is underappreciated by investors and is a fertile source of growth.

Bears Say

  • The merger with M2 has exposed Vocus to the margin dilutive NBN regime.
  • While steps are being taken to improve in these areas, it is abundantly clear Vocus has bitten off more than it can chew with its recent spate of mergers and acquisitions, with reporting and technology systems woefully inadequate for what is a major player in the telecom big leagues.

Source:Morningstar

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Small Cap

Link Administration Holdings Ltd

The acquisition of U.K.-based Capita Asset Services in 2017 reduced the proportion of revenue from Link’s Australian businesses to around 60% of group revenue. We expect the key earnings driver for both the U.K. and Australian businesses to be cost reductions over the next three years, underpinning an EPS CAGR over the next decade of around 10%.

  • Link benefits from high customer switching costs and relatively low marginal costs, which underpin its narrow economic moat rating. The capital-light business model should enable returns on invested capital to comfortably exceed the weighted average cost of capital.
  • We forecast EPS to grow at a CAGR of 10% over the next decade, driven by revenue growth and margin expansion from acquisition-related synergies.
  • Questions remain around earnings growth drivers beyond planned cost cuts. Link may use acquisitions to drive earnings growth, but this strategy has associated risks.

Link Administration has created a narrow economic moat in the Australian and U.K. financial services administration sectors via its leading positions in fund administration and share registry services. Client retention rates exceed 90% in both markets, underpinned by inflation-linked contracts of between two and five years. The capital-light nature of the business model should enable good cash conversion, regular dividends, and relatively low gearing. Earnings growth prospects are supported by organic growth in member numbers, industry fund consolidation, and continued outsourcing trends.

The company was formed via numerous acquisitions made since 2005 under the ownership of private equity firm Pacific Equity Partners, banks and AMP, which have a reasonably low probability of outsourcing. The remaining 30% comprises a combination of government-owned entities and relatively small superannuation funds, which are likely to have outsourcing lead times of months or years.

Bulls Say

  • We expect Link’s EPS to grow at a CAGR of 10% over the next decade, driven by a revenue CAGR of 5% per year, in addition to cost-cutting and operating leverage.
  • Our base case assumes Link’s Australian fund administration market share grows by 2.5 percentage points to 32.5% over the next five years.
  • The capital-light nature of the business model should enable regular dividends, and low financial leverage creates the opportunity for debt-funded acquisitions.

Bears Say

  • Both superannuation fund administration and share registry services are reasonably commoditized, and sizable competitors exist in both segments.
  • Link’s core businesses may struggle to grow meaningfully beyond low- to mid-single-digit growth rates.
  • Superannuation fund administration and registry services have become more efficient as a result of increasing use of software and automation of processes. However, this raises the prospect of disruption by new software-based solutions.

Source:Morningstar

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks Shares

Vocus Group Ltd – Spin Off Business

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

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

Key Considerations

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

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks Shares

Wesfarmers Ltd – Exceptional Growth

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

Key Investment Consideration

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

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks Shares

Westpac Banking Corp– Earnings To Retrace

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

Key Investment Considerations

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

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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IPO Watch

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

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

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

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

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

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

Link Administration Holdings Ltd Company Profile

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

Source: Morningstar

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks Shares Technical Picks

“Can Lives Here” Is No Marketing Gimmick for Commonwealth Bank

Amber markets itself as a provider of cheap electricity, which Commonwealth Bank will promote to its mobile banking customers. Little Birdie will help the bank provide rewards and exclusive offers for Commonwealth Bank customers, probably a way of winning back share from the likes of Afterpay. The initiatives will not appeal to everyone, with these product enhancements likely appealing more to younger demographics who in the future become more profitable home loan customers. Generating annual profit north of AUD 8 billion, the bank has the luxury to: 1) invest in new and even unproven products; and 2) respond to consumer preferences.

It’s hard to say if recent investments will lead to material revenue windfalls, but we think the bank’s relatively small investments make sense as it attempts to build more engaged and satisfied customers. Our buy now, pay later analyst expects the market to grow materially over the next 10 years, but the incumbents will lose share, partly due to the major banks rolling out their own offerings. Commonwealth Bank shares are up over 50% in the last 12 months, and while we agree confidence in the earnings and dividend outlook is warranted, shares trade at a 30% premium to our fair value estimate. The fully franked dividend of AUD 4 per share, or 4% yield is likely attracting retail investors, but we caution against chasing shares for income. It is not hard to imagine the share price falling more than AUD 4 in a tough year, or even a month for that matter. Hopefully the earnings share price volatility of 2020 has not already been forgotten.

Commonwealth Bank’s consumer lending business, less than 2.5% of loans but we estimate around 8.5% of operating income, includes credit cards which are being impacted by growth in the buy now, pay later, or BNPL, sector. It’s not a surprise the bank is fighting back. It owns 5% of Klarna (50% of Klarna Australia), has the CBA BNPL offering, and a no-interest card called Neo.

Company Profile

Commonwealth Bank is Australia’s largest bank with operations spanning Australia, New Zealand, and Asia. Its core business is the provision of retail, business, and institutional banking services. An exit from wealth management is ongoing, with the bank still holding a 45% stake in Colonial First State. The bank has placed a greater emphasis on banking in recent years.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

Ramsay Health Care Ltd

Ramsay’s offer of GBP 2.40 per Spire share represents an enterprise value of GBP 2 billion or EV/EBITDA multiple of 10.9 on pre coronavirus fiscal 2019 earnings. Post-acquisition, our EPS for fiscal years 2023 to 2025 increases by an average of 11%, slightly ahead of the high-single-digit EPS accretion management guided for fiscal 2024. However, we still view the transaction price as fair, with shares still screening as overvalued.

We expect Spire’s revenue to grow at a low-single-digit percent and operating margin to largely be maintained at 10%. In addition, we factor in GBP 26 million in annualised cost synergies from fiscal 2024 through procurement benefits, capacity utilisation and a reduction in administrative costs. The scheme is first subject to a Spire shareholder vote expected in July 2021, followed by a likely 12-month review process by the U.K. Competition Market Authority, or CMA. Ramsay’s 8% market share combined with Spire’s 17% would create the largest independent hospital operator in the U.K., but at most we anticipate CMA may require Ramsay to divest certain hospitals or clinics. Accordingly, we forecast full integration and control in fiscal 2023 and full realization of synergies in fiscal 2024.

We view the acquisition as strategically sound, in addition to extending Ramsay’s geographic reach. Spire provides more exposure to private revenue streams and higher acuity inpatient admissions. This complements and balances Ramsay’s U.K. case mix, which is dominated by day patients and revenue sourced from the National Health Service. We anticipate Ramsay to fund the deal through existing debt facilities and still afford a 50% dividend payout ratio. However, Ramsay indicated potential capital management initiatives or asset sales to deleverage its balance sheet if needed.

Profile.

Ramsay Health Care is the fifth-largest global private hospital operator with approximately 480 locations in 11 countries. The key markets in which it operates are Australia, France, the U.K., Sweden and Norway. It is the largest private hospital group in each of these markets other than Norway where it is number two and the U.K. where it ranks fourth. Ramsay Health Care has a history of acquisitive growth, with the most recent acquisition being that of Stockholm-listed Capio AB in November 2018. 51%-owned Ramsay General de Sante is listed on Euro next Paris. Ramsay Health Care undertakes both private and publicly funded healthcare.

Source:Morningstar

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.