Tag: European Market
Business Strategy & Outlook
While the coronavirus and geopolitical conflict present near-term demand headwinds, the Accor to expand share in the hotel industry over the next decade as a result of its solid loyalty and exposure to the millennial traveler through its growing lifestyle brands, supporting its intangible brand asset advantage, the source of its narrow moat. As a result, the Accor posted more than 3%-unit growth on average over the next 10 years, well above the roughly 1% long-term industry rate in its core European region (58% of total hotels in 2021). Accor’s growing room share is being driven by an increased presence in higher-end luxury/upscale rooms, which were 27% of its total in 2021. This higher luxury presence diversifies Accor from its core economy/midscale exposure, which more directly competes against Airbnb and other alternative accommodations.
The European travel to rebound in 2022-23, aided by the region’s increased vaccination rates and an ingrained desire to travel. The Accor positioned to benefit from such a recovery, given most of its hotels are in Europe, and given the company’s pracademic (2017-19) revenue per available room growth in the region exceeded the industry rate, driven by its intangible asset advantage. This recovery despite the Russian invasion of Ukraine, where around 1% of Accor’s portfolio resides. Accor sold a meaningful portion of its owned assets in 2018-19, leaving the remaining company with 98% of its rooms tied to asset-light franchise and managed business as of the end of 2021, up from 58% of the mix in 2014. These asset-light rooms offer high returns on invested capital and contract lengths of 30 years that are costly to terminate, resulting in a switching cost advantage for the company. Additionally, recent asset sales have helped provide the company enough liquidity to operate into 2023 at near zero revenue demand levels, even before tapping upon its remaining EUR 1.76 billion revolver or needing to raise financing.
Financial Strengths
While the pandemic makes near-term industry travel demand uncertain, Accor’s financial health is far clearer. By calculating that since 2018, Accor’s disposal of owned assets and investments has provided between EUR 6 billion-EUR 7 billion in cash, which provides the company with enough liquidity into 2023 at near zero revenue generation, even before tapping the remaining availability on its EUR 1.76 billion under its revolver. Accor’s debt/adjusted EBITDA turned negative in 2020, as the pandemic stalled demand, but EBITDA turned slightly positive in 2021, as demand rebounded and Accor executed on removing fixed and variable costs out of its business. This compares with 2019’s 4.5 times level. As demand continues to recover, the Accor’s debt/adjusted EBITDA reaching 4.3 and 3.5 times in 2022 and 2023, respectively. Accor has suspended dividends and share repurchases until demand visibility improves, which one believe is being done out of extreme caution–not out of necessity. The dividends and share repurchase to resume in 2023. Accor’s EBIT/interest coverage ratio was 9 times for 2019, and then turned negative in 2020, followed by a move back into positive territory in 2021. Its coverage ratio reaching 4.7 and 6.6 times in 2022 and 2023, respectively. The Accor will generate EUR 2.3 billion in free cash flow over the next five years, which gives us confidence in its ability to meet the EUR 1.5 billion in debt obligations during that time.
Bulls Say
- Accor’s mid-single-digit share of hotel industry rooms is set to increase, as the company controls about 10% of the rooms in the global hotel industry pipeline.
- Accor’s recent investments (Fairmont and Raffles, Mantra, Mantis, Movenpick, and Atton) have diversified it in the attractive growth segment of international luxury brands.
- Accor has sold the vast majority of its Hotel Invest (owned assets) portfolio in 2018-19 and Orbis and Movenpick owned portfolio in 2020, which leaves a more asset-light company with higher margins.
Company Description
Accor operates 778,000 rooms across over 40 brands addressing the economy through luxury segments, as of Dec. 31, 2021. Ibis (economy scale) is the largest brand (37% of total rooms at the end of 2021), followed by Novotel (14%) and Mercure (15%). FRHI offers additional luxury and North American exposure. After the sale of the majority of Hotel Invest (owned assets) in 2018-19, the majority of total EBITDA comes from Hotel Services (asset-light). Northern Europe represents 21% of rooms, Southern Europe 23%, Asia-Pacific region 31%, Americas 13%, and India, Middle East, and Africa 12%. Economy and midscale are 73% of rooms.
(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.
Business Strategy & Outlook
The wide-moat Hermes International has carved out a unique niche in the luxury goods industry, which will provide it with continuing superior returns on capital. Hermes’ iconic leather bag styles (part of the more than EUR 4 billion leather goods segment) are in limited supply, supporting the brand’s exclusivity perception and providing the company with demand visibility and significant pricing power. Hermes Birkin and Kelly bags are sold in secondary markets and auctions for higher than the initial purchase prices–an impressive feat for soft luxury goods. The remainder of Hermes’ product portfolio has a wide moat and includes small leather goods, scarves, jewelry items, saddles, and dining sets. These goods cater to aspirational consumers and high-net-worth individuals and also serve as gifts, providing Hermes with recurring demand and protecting it from cyclical demand fluctuations.
Hermes is distinctive among competition thanks to its vertically integrated supply chain, from leather tanning to leather goods stitching to controlled distribution through owned and operated (as well as concessional) stores. This allows the company to maintain the necessary quality control (and the perception of it among consumers) and certain price positioning (no discounting). Over the years, Hermes has been carefully managed, but as it expands, maintaining the exclusivity perception and strong top-line growth may become more challenging. The Hermes to expand through maintainable pricing power, widening the product range, and minor store count additions. Demand should be driven by the increasing number of high-net-worth and middle-class individuals globally, as well as growth in their incomes. China is still expected to remain the biggest growth driver in the longer term, as consumption is supported by higher wages through a shrinking labor pool and new fortunes are made in such industries as technology and other value-added sectors.
Financial Strengths
Hermes is practically debt-free (excluding operating leases) with over EUR 4.6 billion in cash on its balance sheet. Its financial position is very sound. Given relatively low investment needs relative to cash generated, Hermes has ample room for maintainable increase in the dividend, paying special dividends, and complete stock buybacks.
Bulls Say
- Hermes benefits from unique positioning in the leather goods segment, supported by a supply/demand mismatch for its iconic bags.
- Hermes products include both big-ticket items and a range of small accessories that can be used as gifts, which helps to limit cyclicality and engages a broader customer audience.
- Disciplined expansion in a cyclical upswing allowed the company to maintain its exclusivity perception and contributed to profitability improvement.
Company Description
Hermes is a 180-year-old family-controlled luxury goods company best known for its Birkin and Kelly bags. Its biggest segments are leather goods and saddlery, accounting for around half of revenue; clothes and accessories (22% of sales); silk and textiles (7%); and other products such as perfumes, watches, jewelry, and home furnishings. Hermes has around 300 stores globally, of which it owns and operates 221.
(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.
Business Strategy and Outlook
Kerry Group has evolved from its humble roots as an Irish dairy co-operative into a global flavour and nutrition powerhouse serving the food, beverage, and food-service sectors. The wide economic moat rating is supported by intangible assets and switching costs stemming from the company’s wide range of ingredient solutions and strong service component, which contributes to partnership like client relationships. Kerry works with clients to find market opportunities that can be successfully delivered, in contrast to its flavour and fragrance competitors, which take a more transactional strategy that focuses on delivering bespoke taste solutions utilizing their considerable research and development resources.
These holistic collaborations with a range of customers from various end-use segments and geographies produce essential market and consumer insights that enrich Kerry’s service offering, a virtuous cycle at the heart of the company’s considerable competitive advantages. Post coronavirus, Kerry has unique exposure to the most dynamic segments of the global food and beverage business, since two thirds of its revenue comes from local and regional food and beverage clients and approximately one fifth is derived from the food-service market. Taste and nutrition accounts for over 92% of sales and is the primary growth engine for Kerry. The worldwide food ingredient and taste industry is fragmented, with projected sales of more than $70 billion and a growth rate of 2% to 3%. Kerry is one of the industry’s 10 major firms, which accounts for less than 50% of industry revenue. Kerry’s other section is a somewhat undifferentiated dairy business, after the recent sale of the company’s meals and meats division.
Financial Strength
Kerry is in strong financial health. The company has moderate financial gearing, with net debt/2021 adjusted EBITDA of 1.9 times, and consistently generates good amounts of free cash flow, though at a lower level than F&F companies and the leading consumer staple companies in general. Aggregate acquisition spending of around EUR 1.25 billion through the next five years based on the company’s strategy to lead consolidation in the fragmented food ingredient and flavour market. Due to Kerry’s acquisitive nature and above-average capital spending, discretionary cash generation (free cash flow will average close to 5% of sales over the next five years) is moderate. Typically, Kerry spends 3%-5% of sales on capital expenditures and around 6.5% (based on taste and nutrition sales) on average on bolt-on acquisitions. Although the former is to remain in line, the capital spending on acquisitions normalising a bit over the next five years, but still remaining adequate driven by the company’s core strategy to further develop its integrated solutions offering through a broader geographic presence and a wider range of ingredient solutions, catering better to both the food-service and developing markets. The dividend policy looks conservative, given a fiscal 2021 payout ratio of about 25% despite moderate financial gearing and good free cash flow generation. It appears Kerry may be deliberately keeping sufficient financial flexibility in case it decides to undertake a significant, transformational acquisition mostly paid in cash, though past experience.
Bulls Say’s
- Kerry’s integrated solutions model is hard to replicate due to its high service component (based on decades of experience) and wide range of solutions offered.
- Kerry is one of the largest firms in a fragmented flavour and specialty food ingredient industry, which provides ample opportunities to consolidate and gain meaningful scale.
- Ingredient sales are expected to grow faster than food or beverage sales because of outsourcing, secular trends like clean labelling and health and wellness, and a rising number of applications and technologies (driving volume growth).
Company Profile
Kerry Group is a global leader in taste and ingredient technology servicing the food, beverage, and pharmaceutical sectors. The company’s more than 150 manufacturing facilities supply clients in 150 countries with 18,000 food and ingredient items. It gets around 80% of its revenue from developed countries and 20% from the developing world, servicing a wide range of end-use sectors, such as meat, meals, snacks, dairy, drinks, and pharmaceuticals. Kerry has expanded through a combination of organic development and multiple tuck-in acquisitions.
(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 is 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.