Tag: European Market

Categories
Global stocks

Dufry Should Benefit from Travel Recovery in 2022 Despite Geopolitical Uncertainty

investment stockbroker risk analysis using multiple devices. Financial analysis using phone app and laptop. Market trading profit.

Business Strategy and Outlook 

As a leading player in travel retail and a leading concession operator in airport retail with around 20% market share, more than double that of its next biggest peer, Dufry is well positioned to benefit from increasing global travel flows. Over the years, Dufry has played the role of consolidator in a globally fragmented industry, allowing it to achieve purchasing scale, breadth of store formats and product offer, and geographical diversification. We contend that airports capture the bulk of value in airport retail through concession fees of about 30%, owing to ownership of unique real estate assets. Nonetheless, we believe that Dufry, as the most efficient retail operator in over 400 locations globally, benefits from a purchasing scale that not many competitors or airports can match as a stand-alone entity (the global airport industry is rather fragmented and 70% publicly controlled, hindering consolidation). Dufry should thus be well positioned to withstand concession inflation pressure and consolidate the industry as weaker operators exit the market, which should increase its bargaining power in the long term. Dufry also provides value for suppliers (many of them fast-moving consumer goods companies and luxury brands) by giving exposure to an attractive high-growth distribution channel with brand-building opportunities to an affluent, captive audience.

We believe Dufry should be able to expand by about 3%-4% annually over the 10-year forecast period (from prepandemic levels) through a mix of organic growth (driven by increasing passenger numbers) and new concessions (gained organically or through consolidation). We expect operating margins (excluding acquisition-related amortization) to be broadly stable, with gross margin efficiencies and scale offset by airport concession inflation, both effects moderating over time.

Financial Strength

Dufry had around CHF 2.2 billion in available liquidity at the end of December 2021, which should be sufficient for many months under management’s assumption of CHF 20 million monthly cash burn with revenue 40% lower than 2019 levels and CHF 10 million monthly cash burn with revenue down 35% against 2019 levels. We assume revenue in 2021 to be 21% lower than that reached in 2019. Covenant testing has been delayed until 2023 with a threshold of 5 times net debt/adjusted operating cash flow. We expect the company to be in compliance with covenants as travel picks up. It is believed the liquidity risk for the company can be considered low

Bulls Say’s

  • Dufry is well positioned to benefit from increasing passenger flows, which have historically grown faster than global GDP. 
  • Investment in digital initiatives, such as “reserve online, collect at the airport,” could increase spending per passenger, as actual airport buying may be currently limited by the time constraints. 
  • Dufry has room to expand its business into new geographies (Asia) and new business areas (downtown duty-free, duty-free on cruise ships)

Company Profile 

Dufry is the world’s largest duty-free shop operator and leader in travel retail. It commands about 12%-13% share in a fragmented global travel retail market, including around 20% in airport retail (more than double that of the next biggest competitor), through its presence in 65 countries and about 420 locations globally; airports make up over 80% of the company’s total revenue. Dufry’s main markets are Europe (45% of revenue), Americas (about 45% revenue each), and Asia, the Middle East, and Australia.

(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.

Categories
Global stocks

Maintaining CHF 620 Fair Value Estimate for Narrow-Moat Lonza; Shares Undervalued

Business Strategy & Outlook:   

Lonza Group has been a dominant player in the contract development and manufacturing space for decades. The company thinks the outlook for Lonza looks bright, especially as drug manufacturing becomes more complex with biologics and cell and gene therapies playing larger roles in the overall mix. Lonza’s 2021 CHF 4.2 billion divestment of its former specialty ingredients business to Bain Capital and Cinven as positive since it allows for an increased focus on further expanding its biopharma contract manufacturing business. Lonza’s specialty ingredients customers were large consumer goods and industrials players, which had significant bargaining power. As a result, this segment had lower margins and shorter contracts of one to three years compared with its lengthy contracts for its biopharma manufacturing business. 

Lonza maintains an extensive network of partnerships with pharmaceutical and biotechnology firms that leverage its expertise and scale to optimize drug production and avoid the risks of in-house manufacturing. Company anticipates outsourcing penetration will continue to incrementally increase, driven by the complexities of biologic manufacturing. Only one-third of pharmaceutical manufacturing is currently conducted in-house while two-thirds are outsourced. Additionally, the customer relationships in Lonza’s contract manufacturing segment are sticky and long-lasting, as drug companies tend to stick with trusted suppliers with good track records of regulatory compliance. Biopharma customers are likely to continue outsourcing manufacturing in order to benefit from access to flexible capacity and manufacturing improvements.

Financial Strengths:  

Lonza is in fair financial health, and company expects the business to continue providing a steady stream of cash. The company has historically utilized debt, particularly for acquisitions. The company ended 2017 with CHF 3.8 billion in debt after acquiring Capsugel with a mix of debt and equity. Since then, the company has steadily deleveraged. It is expected that the company will be able to meet its financial obligations with its free cash flow. Lonza also divested its specialty ingredients business in July 2021 for CHF 4.2 billion. Management is using the proceeds from the divestment to further improve its biopharma manufacturing capabilities. The management team has a continued record of returning cash to shareholders in the form of dividends, with a dividend of CHF 3.00 paid in 2021. The payout ratio as a percentage of adjusted earnings per share has varied between 20% and 40% over the last few years, depending on cash needed for capital expenditures. The payout ratio has trended down in recent years due to increased investment in new manufacturing capabilities. Due to the business’ strong cash flow, the management will maintain its dividend policy and utilize cash for dividend payments, debt paydown, internal investment, and opportunistic deals.

Bulls Say: 

  • The pharma biotech and nutrition segment are a sticky business with long-term contracts and high switching costs for its customers.
  • As drug portfolios are increasingly made up of complex drugs like biologics and emerging therapies, Lonza’s biopharma customers will be more reliant on outsourced manufacturing.
  • With its global scale, Lonza is less dependent on any one customer or drug, which allows it to better absorb surprising late-stage failures or drops in demand

Company Description:  

Lonza Group is a contract development and manufacturing organization, or CDMO. It operates under four segments: small molecules, biologics, cell & gene, and capsules & health ingredients. Lonza derives its revenue primarily from long-term supply agreements with pharmaceutical customers. The company provides a range of development and manufacturing services throughout the entire lifecycle of a product from drug research to commercial supply. The majority of Lonza’s customers are pharmaceutical and biotechnology companies, academic institutions, and government research organizations.

(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

We Increase Lufthansa’s FVE as We Update Our Model

Business Strategy & Outlook

Deutsche Lufthansa is a European network carrier utilizing a hub-and-spoke model. Its major hubs are Frankfurt, Munich, Vienna, and Zurich and flies under the Lufthansa, Swiss Air, and Austrian Airlines brands. As a result of the coronavirus downturn the group embarked on a cost and fleet restructuring program, which will see it emerge as a smaller business. Despite the smaller size the group to become a more profitable business as a result of structural cost reductions and fleet efficiencies and forecast EBIT growth of 8.5% per year to 2026 from 2019 pre coronavirus levels. However, the negative about the prospects for shareholder value creation due to the high level of indebtedness. 

In 2020, the group received a government-backed support package totaling EUR 9 billion, which included an equity stake of 20% by the German government for EUR 306 million. As part of the approval process the European Commission required the group to surrender 26 slots at its Frankfurt and Munich hubs to new competitors. Despite the recent EUR 2.1 billion rights issue, the group remains highly indebted, which may require additional capital restructuring if cash flows don’t recover to suitable levels to deleverage organically. Due to the group’s indebtedness and highly uncertain timing of a recovery in cash flows, there is still a wide range of possible outcomes for the group’s equity value. The company will retire and dispose of its older fleet, which will see the group emerge with 100 to 150 fewer aircraft than its current 760-strong fleet. The group is in the process of restructuring its cost base and aims to reduce its current 138,000 employees by 16% and cut the management team by 20% by 2022. The group can drive higher load factors as a result of better utilization of a more efficient fleet and emerge with a structurally higher EBIT margin of 8% in 2025, which compares with an average margin of 7% over the five years pre-COVID-19.

Financial Strengths 

The Lufthansa is in a weak financial position due to its high levels of indebtedness. The coronavirus pandemic dealt a heavy blow to the aviation industry, resulting in record losses, cash outflows, and growing debt levels. To bolster liquidity, the group agreed to a EUR 9 billion government support package, which included the German state taking a 20% ownership in the group. Net debt, including pension provisions of EUR 7.6 billion, at the end of December 2021 equated to EUR 15.6 billion. The group is highly geared, with a net debt to prepandemic EBITDA ratio of 3.5 times, and it could require multiple years of deleveraging to restore the balance sheet to maintainable levels.

Bulls Say

  • COVID-19 presents the group with a unique opportunity to structurally lower its cost base and emerge from the crisis with better profitability. 
  • The airline has dominant positions at the key European hubs of Frankfurt and Munich, which could be an early beneficiary of a recovery in air travel. 
  • Fleet reduction through the retirement of older and less efficient aircraft could lead to a more rational fleet with higher load factors and unit revenue.

Company Description

Deutsche Lufthansa is a European airline group. The company operates under the Lufthansa, Swiss Air, Austrian Airlines and Euro wings brands. In 2019, the company carried 145 million passengers to its network of 318 destinations globally. The group’s main airport hubs are Frankfurt, Munich, Vienna and Zurich. The company generated sales of EUR 36.4 billion in 2019. 

(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

Aviva Is Shifting the Focus of Its Business

Business Strategy & Outlook

As a good middle-of-the-road insurer Aviva has had its fair share of problems over the years. As with many previously poorly run companies, these issues have stretched across leverage, controls, turnover and likely relatedly, its sprawling business portfolio. While prior leadership teams tried to get a handle on this business, up until now none have really done so. The attribute this to a focus on growth and innovation, without a focus on strong capital management and discipline. Mark Wilson’s tenure was characterized by the Friends Life acquisition, the digital garage and his appointment at BlackRock. It felt like Maurice Tulloch would tilt the business more toward general insurance but it is likely that the business’ problems became too much for him. Present CEO Amanda Blanc is now set on making things right and has divested noncore assets, promising now to focus on the U.K., Ireland, and Canada.

Aviva is not a highly differentiated business and does not have a strong strategy. As a middle of the road business one can think reinvestment is critical. Two of its three objectives have been achieved in and those are focus and financial strength. However, what to see is how Blanc will transform the remaining assets into a collection of units that are better than they are and perhaps approaching market-leading. From what this is about investing in exceptional customer service and it’s hard to imagine anyone disputing that need. All too often that falls by the wayside in this segment of financial services. However, there is no disputing that excellent customer service has tangible and financial benefits. It leads to lower customer turnover and lower acquisition costs both in terms of volume and margin. Lastly, this is largely a long-term savings business so accretive investment in Aviva Investors will be crucial.

Financial Strengths

The Aviva has a weak balance sheet. Aviva’s debt is a little over half of its shareholders’ equity. Most of this is core structural borrowings that are held by the center. Pleasingly, management has decided to appease investors with a near GBP 2.0 billion debt reduction in 2021 and a further GBP 1.0 billion debt reduction program over the coming years. This debt reduction plan has been assisted by the GBP 7.5 billion raised from the eight business sales. This has provided management with plenty of room to commence a GBP 1.0 billion buyback on top of the deleveraging. The net of these actions should substantially improve the business’ leveraged position. The interim dividend for 2021 was increased to GBX 7.35 per share and the total dividend for the year will be GBX 22.0. This means a final of GBX 14.7 per share for full-year 2021. Guidance is for a dividend of GBX 31.5 for full results of 2022.

Bulls Say

  • Aviva’s new CEO is still making good strides to focus, transform, and simplify the business.
  • Leverage has been an issue, and this is a primary focus of the new management team.
  • Targeted capital remittance plans provide a nice buffer for further buybacks or business reinvestment.

Company Description

Aviva is a multiline insurer headquartered in the United Kingdom. It traces its roots back to the late 1700s with the establishment of the Hand-in-Hand Fire Office, a mutual insurer of loss from fire. This mutual, along with many other entities acquired and established over the years, was purchased by Commercial Union in 1905. In the late 1990s, Commercial Union and General Accident merged to form Commercial General Union, or CGU. A few years later CGU and Norwich Union merged and later rebranded as Aviva. Aviva acquired Friends Life in 2015. Aviva has been through quick successions of leadership in recent years. Mark Wilson served as CEO in the five years between 2013 and 2018. Then Maurice Tulloch took over and led up to July 2020. Amanda Blanc has led since then.

(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

Narrow-Moat Adidas Is Dealing with the Pandemic and Other Challenges, but Its Brand Power Remains

Business Strategy and Outlook Adidas is a leader in athletic and “athleisure” apparel with a narrow-moat rating based on an intangible brand asset. While sales declined in 2020 due to COVID-19 and the recovery has been rocky, Adidas is poised to meet many of the goals of its five-year Own the Game plan. For example, its e-commerce, now available in nearly 60 countries, generated EUR 3.9 billion in sales in 2021, accounting for 19% of its total. Adidas expects its e-commerce to rise to EUR 8 billion-EUR 9 billion in 2025, which is achievable. Further, the firm’s new sportswear offerings and plans to improve its position in key categories like running and outdoor will be successful. However, because of heavy competition and pandemic-related disruption, the estimates are below or at the low end of Adidas’ five-year targets of compound average sales growth of 8%-10%, average net income growth of 16%-18%, and 2025 gross and operating margins of 53%-55% and12%-14%, respectively.

There is a continuing growth for Adidas in North America, which accounted for 24% of 2021 sales. Although impacted by the pandemic and supply issues, the firm has overcome weakness in U.S. physical retail in the last few years by introducing innovative and fashionable products. It is believed it has gained North America market share through fashion products and performance-sports innovations, and these products will allow it to maintain share even if the recent athleisure and retro trends, which have helped the brand, cool off. Although it has recently had difficulties in the country, it is believed that Adidas has a strong opportunity in the athletic apparel market in China, now the second-largest in the world after the U.S. The firm’s sponsorship of international football (soccer) puts it in position to benefit from heavy investment in the sport in China. Its sales in Greater China will rise to EUR 6.1 billion in 2025 from EUR 4.6 billion in 2021.

Financial Strength

 Adidas is in good financial shape coming out of the COVID-19 crisis. After having paid down EUR 600 million in debt in 2021 and closing its EUR 2.1 billion Reebok sale, it closed March 2022 in a net cash position with EUR 3.1 billion in cash and EUR 2.5 billion in long-term debt. Adidas recently closed its revolving credit facility with a state-owned bank in Germany and replaced it with a EUR 1.5 billion facility with a group of banks. Unlike the prior facility, this new credit line allows the firm to pay its typical annual dividend. The firm does have significant commitments for marketing and overhead operating expenses which totalled EUR 2.5 billion and EUR 6.3 billion, respectively, in 2021. Adidas has a publicly stated target ratio of net debt/EBITDA of less than 2.0 and has been well below this level for at least a decade. Adidas will return significant cash to shareholders. In 2021, the firm generated EUR 2.4 billion in free cash flow/equity (11% of sales), repurchased about EUR 1 billion worth of stock, and paid about EUR 600 million in dividends. Adidas will generate about EUR 12.5 billion in cumulative free cash flow/equity over the next five years and use this to issue EUR 3.7 billion in dividends and repurchase EUR 7.1 billion in shares. It is believed that an average dividend payout ratio of 32% in this period, within the stated target range of 30% to 50%. However, it is believed Adidas reduces shareholder value if it repurchases shares above the fair value estimate, as has typically been the case over the past few years.

Bulls Say’s

  • Adidas’ e-commerce gives the company greater control over its brand and pricing. The firm has increased its digital capabilities and cut wholesale accounts. Adidas’ e-commerce sales were nearly EUR 4 billion in 2021, or about 19% of total sales. 
  • Adidas’ partnerships with celebrities like Beyonce provide an edge over other athletic apparel firms. The firm has greatly expanded its Yeezy brand with no apparent loss of consumer interest. 
  • Adidas has about 15% market share in China, the fastest-growing athletic apparel market, and will benefit from the growth of athletics in the country.

Company Profile 

Adidas designs, develops, produces, and markets athletic and leisure apparel, footwear, accessories, and sports equipment. Under its eponymous brand, it produces apparel for competitive athletics, casual activewear, and casual fashion. Its fashion brands include Yeezy, Ivy Park, and Y-3. Adidas sells its products in more than 160 countries through more than 2,100 owned retail stores, 15,000 mono-branded franchise stores, 150,000 wholesale doors, and more than 50 e-commerce sites. The company was founded in 1949 in Germany.

(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.