Tag: European Market
Business Strategy and Outlook
It is alleged of InterContinental to retain its brand intangible asset (a source of its narrow moat rating) and expand room share in the hotel industry in the next decade. Renovated and newer brands supporting a favourable next-generation traveller position as well as its industry-leading loyalty program will drive this growth. The company currently has a mid-single-digit percentage share of global hotel rooms and 11% share of all industry pipeline rooms. Projection is that its total room growth averaging 3%-4% over the next decade, above the 1.8% supply increase estimated for the U.S. industry.
With 99% of rooms managed or franchised, InterContinental has an attractive recurring-fee business model with high returns on invested capital and significant switching costs (a second moat source) for property owners, as managed and franchised hotels have low fixed costs and capital requirements, and contracts lasting 20-30 years have meaningful cancellation costs for owners.
InterContinental’s brand and switching cost advantage is anticipated to strengthen, driven by new hotel brands, renovation of existing properties, technology integration, and a leading loyalty program, which all drive developer and traveller demand for the company. InterContinental has added six brands since 2016; it now has 16 in total. InterContinental announced in August 2021 a new luxury brand, with details to be provided soon. Additionally, the company announced a midscale concept in June 2017, Avid, which the company sees as addressing an underserved $20 billion market with 14 million guests, under a normal demand environment. Also, InterContinental has recently renovated its Crowne Plaza (13% of total room base) and Holiday Inn/Holiday Inn Express (62%) properties, which can support its brand advantage. Beyond this, the firm has over 100 million loyalty members, providing an immediate demand channel for third-party hotel owners joining its brand.
Financial Strength
InterContinental’s financial health remains good, despite COVID-19 challenges. InterContinental entered 2020 with net debt/EBITDA of 2.6 times, and its asset-light business model allows the company to operate with low fixed costs and stable unit growth, which led to $584 million in cash flow generation in 2021. During 2020, InterContinental took action to increase its liquidity profile, including suspending dividends and deferring discretionary capital expenditures. Also, the company tapped $425 million of its $1.3 billion credit facility, which has since been repaid. As a result, InterContinental has enough liquidity to operate at near zero revenue into 2023. It can be gathered that banking partners would work to provide InterContinental liquidity as needed, given that the company holds a brand advantage, which will drive healthy cash flow as travel demand returns. InterContinental’s EBIT/interest coverage ratio of 5.2 times for 2019 was healthy, and theoretically it can average 9.0 times over the next five years after temporarily dipping to 3.4 times in 2021. Conjectures are that the company generates about $2.3 billion in free cash flow (operating cash flow minus capital expenditures) during 2022-26, which it uses to pay down debt, distribute dividends, and repurchase shares (with the last two starting in 2022).
Bulls Say’s
- InterContinental’s current mid-single-digit percentage of hotel industry room share is set to increase as the company controls 11% of the rooms in the global hotel industry pipeline.
- InterContinental is well positioned to benefit from the increasing presence of the next-generation traveler though emerging lifestyle brands Kimpton, Avid, Even, Hotel Indigo, Hualuxe, and Voco.
- InterContinental has a high exposure to recurring managed and franchised fees (around 95% of total operating income), which have high switching costs and generate strong ROIC.
Company Profile
InterContinental Hotels Group operates 884,000 rooms across 16 brands addressing the midscale through luxury segments. Holiday Inn and Holiday Inn Express constitute the largest brand, while Hotel Indigo, Even, Hualuxe, Kimpton, and Voco are newer lifestyle brands experiencing strong demand. The company launched a midscale brand, Avid, in summer 2017 and closed on a 51% stake in Regent Hotels in July 2018. It acquired Six Senses in February 2019. Managed and franchised represent 99% of total rooms. As of Dec. 31, 2021, the Americas represents 57% of total rooms, with Greater China accounting for 18%; Europe, Asia, the Middle East, and Africa make up 25%.
(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.
Business Strategy and Outlook
Ryanair is the largest European carrier based on passenger numbers. Since 2008, the company has grown at an annual rate of 9% from 51 million passengers in 2008 to 149 million passengers in 2020. This growth was achieved by deploying a rigid and focused low-cost strategy and passing on the savings by lowering fares to attract an underserved leisure passenger at the low end of the market. Market share growth coupled with a firm grasp on cost containment should drive double-digit profit growth over the medium term. A decade of air travel growth was brought to a grinding halt by the coronavirus pandemic. Short-haul, domestic leisure demand should see a speedier recovery, while long-haul, international and business flights face a prolonged recovery as a result of lingering international travel restrictions.
Ryanair’s short-haul, low-cost model and solid balance sheet with ample liquidity places the group in a favourable position to gain market share from weak and failing participants. The group was able to secure an additional 75 orders for the new Boeing 737 MAX, which brings total aircraft orders to 210. The new fuel-efficient plane will allow the group to achieve its target of 225 million passengers in five years’ time, while keeping operating costs low. It is forecasted that annualized revenue and EBIT growth of 7% and 12% to 2027, respectively, from pre-pandemic levels, with margins normalizing at the group’s long-term average of 18%.
To achieve its long-term growth targets, the group is deviating from its long-standing strategy of only serving secondary airports toward targeting higher-cost and slot-constrained primary airports. It is believed that the current downturn will allow the group to access slots and negotiate favourable rates with airports that are desperate for revenue. In time, these higher-cost airports could become a cost headwind for the group. Over the long term, market saturation and increased route overlap with competing low-cost carriers could result in greater price competition, resulting in margin pressure.
Financial Strength
As of Sept30,2021, Ryanair reported debt of EUR 5.7 billion and a cash balance of EUR 4.2 billion, equating to net debt of EUR 1.5 billion. At the onset of the COVID-19 pandemic, and the ensuing crisis that unfolded in the travel industry, Ryanair swiftly accessed the capital markets and raised EUR 400 million in equity to shore up its balance sheet. The group has repaid the EUR 670 million U.K. CCFF loan and a EUR 850 million bond, with no major maturities until 2023. It is believed the group has adequately restructured its cost base and put sufficient measures in place to stem cash outflows over winter and as it heads into 2022. Also, the group has sufficient liquidity to honour its capital and investment obligations. In addition to the EUR 4.2 billion liquidity it has available, the group’s fleet is largely unencumbered and is a source of additional liquidity, should the need arise. It is believed Ryanair is in a sound financial position.
Bulls Say’s
- The group’s solid balance sheet and liquidity headroom will allow it to be opportunistic and capture greater market share from weak and failing peers.
- The downturn allows the group to negotiate better terms with suppliers and labour, which will benefit the unit cost structure once air travel recovers.
- Delivery of 210 new Boeing 737 MAX aircraft will transform the group’s fleet to a younger, more fuelefficient one.
Company Profile
Ryanair is the leading airline group by passenger numbers in Europe. The company employs a low-cost no-frills model to offer low fares to leisure customers on short-haul intra-European routes. In 2020, the most recent pre-pandemic fiscal year, the company carried 149 million passengers, utilizing a fleet of 467 Boeing 737 aircraft across its 1,800 routes. To keep costs low the company serves predominantly lower-cost secondary airports. The company generated sales of EUR 8.5 billion in fiscal 2020
(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.
Business Strategy & Outlook
Stefan Bomhard has a new mantra for Imperial Brands: focus. The CEO unveiled a five-year strategic plan in 2021 that will concentrate investments both geographically and on emerging categories that
are likely to become the largest profit pools in the future. The plan makes sense because it essentially recognizes Imperial’s place in the marketplace–it is a fast follower, rather than a leader,
in most markets, but a highly profitable one with strong cash flow generation potential that should drive returns to shareholders higher in the coming years.
The overarching shift in strategy seems to be that investment will focus on categories and geographies where Imperial has existing strengths, and where consumer demand is likely to be strong. In
the core cigarette business, for example, Imperial prioritizes five tobacco markets (U.S., U.K., Germany, Spain, and Australia) in which it holds significant share and which in aggregate represent
more than 70% of Imperial’s tobacco operating profit. The company has lost share in these markets (except the U.S.) for several years, and increased investments behind its key brands should help stabilize volume declines. Other markets, as well as the firm’s smaller brands, will be managed to maximize cash flow. In next generation products, Bomhard plans to diversify the big bet placed on vaping by exiting vaping markets in which it has not gained traction, in order to target its investments on more profitable
opportunities. In heated tobacco, it is shifting its geographic focus from Japan, where it has very limited share and distribution structure, to Europe, where it has pockets of large shares.
The Bomhard’s plan will unlock value. By making more consumer and capability-centric investments, we expect the financial performance of the company to improve. Imperial has already ceded first mover advantage to Philip Morris International, and the strategy to improve performance seems to depend on regaining share, rather than driving category growth. This is unlikely to come cheap and may require higher spending going forward.
Financial Strengths
With net debt/adjusted EBITDA standing at 2.2 times at the end of fiscal 2021, Imperial’s balance sheet is roughly in line with most peers, including PMI, although gearing is much lower than that of British American Tobacco. The company has deleveraged from its 2015 acquisitions of U.S. assets from Reynolds American and Lorillard, and now intends to maintain an investment-grade credit rating. Imperial’s presence in developed markets makes it a cash-generating machine, even more so since the U.S. acquisitions. The firm has been operating in recent years on a strongly negative cash conversion cycle, and cash conversion has been up there with the best-in-class performers across the global consumer staples space. The cash conversion (defined as operating cash flow divided by operating income) to run close to 100% over five-year explicit forecast period. Imperial remains on course to return to a more normalized leverage position of below 2.5 times net debt/adjusted EBITDA by 2022, the company’s stated leverage target.
Management abandoned its medium-term guidance of 10% dividend growth in 2019, then went one step further in fiscal 2020 by cutting the second-half dividend by one third. With a payout ratio now below net income, the dividends to grow in line with earnings at a low- to mid-single-digit
rate. This is the right strategy because Imperial had been tying its own hands with the 10% growth guidance, at a time when financial flexibility is necessary to invest in long-term growth.
Bulls Say
- The appointment of Simon Langelier, chairman of cannabis oil extract manufacturer PharamCielo, to the board of directors could open the door for Imperial to exploit more liberal legislation in the U.S.
- Imperial generates some of the highest margins in the industry on its cigarette portfolio.
- If plain packaging legislation spreads, Imperial, through its value portfolio, may be the manufacturer best positioned to benefit.
Company Description
Imperial Brands is the world’s fourth-largest international tobacco company (excluding China National Tobacco) with total fiscal 2021 volume of 232 billion cigarettes sold in more than 160 countries. The firm holds a leading global position in the fine-cut tobacco and hand-rolling paper categories,
and it has a logistics platform in Western Europe, Altadis. Through acquisition, Imperial is the third-largest manufacturer in the U.S. and owns the Winston and blue brands.
(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
Salvatore Ferragamo is an Italian monobrand company mainly known for its footwear and accessories. The firm benefits from relatively strong control over distribution (almost 70% of revenue is retail, versus more than 70% for Burberry, Prada, and Gucci, but in line with Hugo Boss), while its strong
representation in airport locations (about 150 travel retail stores) positions it well to benefit from growth in global travel flows and tourist luxury spending (about half of industry spending is done while travelling).
The Ferragamo has not carved a moat. It is a relatively small player in the fragmented luxury footwear category (43% of revenue). The luxury footwear industry is fragmented and largely wholesale (thus prone to discounting), with fast product life cycles, exposing industry players to fashion risk. The leather goods category (44% of Ferragamo’s revenue) as more conspicuous, but Ferragamo is much less established there than market leaders (with 1% market share versus over 15% for Louis Vuitton, 10% for Gucci and 6.5% for Hermes). Moreover, its more affordable price points (EUR 800-1,500 handbags versus EUR 800-4,000 for luxury peers) reduce the prestige value of purchases. The Ferragamo’s pricing power as in line with or toward the lower end of a luxury coverage.
The company is taking actions that could bring it back to the industry average growth after several years of underperformance. The actions such as increasing the firm’s share of “newness” to engage the existing and younger consumer, reining in a subpar distribution channel, and focusing on retail efficiency and supply chain transformation with more flexibility, less pre-committed inventory, and more capacity open to late orders. Still, Ferragamo’s lack of critical mass versus very well-established competition in leather goods and generally a more competitively intense environment in footwear could make a turnaround challenging.
Financial Strengths
Ferragamo’s financial position is solid, with net cash on the balance sheet. Dividend payments have been suspended as the pandemic hit in 2020 and 2021 but resumed from 2022.
To consider a low use of debt to be appropriate, given the operating leverage of the business model (the estimation is around 60%-70% of operating expenses to be fixed in a normal environment) and its cyclicality (revenue declined by 10% during the financial crisis in 2009 and over 30% in 2020). The capital expenditures to be boosted in the near term to over 7% from 3%-5% in the recent five years, focusing on renovations, supply chains and technology, in line with new management’s strategic plan. To moderate after 2026. The average free cash flow margin to be around 9% (versus 7% in 2019 and 23% in 2021). The Ferragamo to be able to meet its financial obligations and business investment needs in the future.
Bulls Say
- Ferragamo is an early entrant in emerging markets, with strong presence and brand recognition in Asia and South America. This positions it to benefit from middle-class growth in those markets.
- Ferragamo has an above-industry presence in airport locations. Around half of luxury purchases are already done while travelling and the number of outbound travelers is expected to grow as incomes rise.
- Ferragamo’s profitability could improve as new collections and store refurbishments drive improving store density (currently on the lower end of the peer group).
Company Description
Founded in 1927, Salvatore Ferragamo is an Italian monobrand company mainly known for its footwear and accessories. The company generates about 43% of revenue in the footwear category, 44% in leather goods, 6% in apparel, 6% in accessories. It was one of the pioneers in establishing a
presence in Asia, where it generates 38% of sales, and other emerging markets (6% of sales in Central and South America). Ferragamo generates 19% of revenue in Europe, 29% in the U.S., and 8% in Japan.
(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
Considering industry trends in connectivity, electronics, and safety, the Continental’s revenue will grow at a faster rate than the estimated 1%-3% long-term average annual growth in global vehicle production. Above-industry-average research and development spending enables consistent product and process innovation, supporting Continental’s revenue growth, healthy return on invested capital, and a narrow economic moat rating.
After an acquisition binge that culminated in 2007 with the purchase of Siemens VDO, Continental has grown from being predominantly a European tiremaker to a global supplier of automotive components, systems, and modules. In 2008, Continental became an acquisition target as Schaeffler unsuccessfully bid for the company (Schaeffler still owns 46% of the voting interest).
Continental should benefit from automotive industry trends, including advanced driver-assist systems, autonomous driving features, V2X connectivity, and increased vehicular electronics. The company invests in and successfully cultivates innovative technologies. The Continental’s innovation combined with industry trends results in revenue growth and margins that are better than industry averages. Management’s long-term targets are to annually increase revenue in excess of 5% and generate adjusted EBIT margins in the 8% to 11% range. Management spun off its powertrain division in September 2021 into a new company called Vitesco that trades under the ticker VTSC. Since 2008, powertrain segment revenue has grown at an average annual rate of 6%. In 2019, pro forma Vitesco had EUR 9.1 billion in pre pandemic revenue and an adjusted EBITDA margin of 9.5%. However, in 2020, Vitesco pro forma revenue was EUR 8 billion with an adjusted EBITDA margin of 6% due to COVID-19-related industry factory closures. While Vitesco supplies components for internal combustion engine powertrains, the new company’s electrified vehicle powertrain product lines should support revenue growth in the mid-single-digit range.
Financial Strengths
Continental’s financial health appears to be in good shape. Management targets investment-grade credit ratings and a gearing ratio (net debt/equity) range of 40% to 60%. At the end of 2021, the company’s liquidity was EUR 7.3 billion, the gearing ratio was 30%, and total adjusted debt/EBITDAR, which treats operating leases as debt and rent expense as interest, was 2.7 times. Since 2011, Continental has averaged 1.8 times total adjusted debt/EBITDAR, while netting cash against debt results in about a 1.4 times ratio. The Continental’s cash generation and liquidity are more than sufficient to buffer a cyclical downturn in auto demand, including lingering effects of the pandemic and the microchip shortage.
By the end of 2006, Continental had reduced its debt to a more prudent level after its acquisitions made between 1998 and 2004. The capital structure became heavily debt-laden in 2007 when management made four acquisitions: Siemens VDO, Matador, Thermopol, and AP Italia. As a result, the company went through the financial crisis with a highly leveraged balance sheet, and debt levels remained elevated through 2013. Since 2011, the gearing ratio has averaged 47%. However, since 2014, Continental’s gearing ratio has averaged only 33%. The company has mostly used bank credit lines but also has outstanding bonds, securitization, factoring, asset-backed securities, commercial paper, and capital leases, all of which are on balance sheet. Maturities appear well laddered with the exception of roughly EUR 1.6 billion in short-term debt. The company has EUR 6.1 billion in open credit lines, of which, EUR 4.9 billion was available at year-end 2021. While Continental’s EUR 4.0 billion revolving bank line of credit due in 2025 had not been utilized, short-term debt includes EUR 1.2 billion outstanding on other lines of credit. The large short-term debt balance has typically been rolled to the next year.
Bulls Say
Continental is well positioned to capitalize on auto industry trends like safety, electronics, connectivity, and automated driving. As a result, the company’s revenue to average growth in excess of average annual growth in global vehicle production.
The ability to continuously innovate new process and product technologies should enable Continental to maintain a narrow economic moat.
A global manufacturing footprint enables participation in global vehicle platforms and provides penetration in developing markets.
Company Description
Continental is a global auto supplier and tiremaker. Operating segments include the autonomous mobility and safety segment and the vehicle networking and information segment in the automotive group, plus tires and ContiTech, which uses rubber in industrial and automotive components and systems, in the rubber group. Last year, pro forma for the spinoff of Vitesco, automotive group revenue was around 45% (AMS 22%, VNI 23%) of the total, rubber group revenue was 52% (tires 35%, CT 17%), and contract manufacturing for Vitesco was 3%. Top five customers include Mercedes-Benz, Ford, the Renault-Nissan-Mitsubishi alliance, Stellantis, and Volkswagen, representing about 33% of total revenue. Europe, at 48% of total revenue, is the company’s largest market, followed by North America at 26%.
(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.
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