Tag: Recommendations

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Technology Stocks

Pegasystems’ Management sizes the market at $50 billion, which includes both customer engagement and BPM

Business Strategy and Outlook

It is alleged Pegasystems is well established in the business process management, or BPM, software niche and further benefits from related customer engagement applications. It is anticipated the company to remain a leading provider in the coming years as it moves customers to its new Pega Infinity platform, which unifies customer engagement with automation. It is held that, the model transition was complicated in the early going, but it is moving to the scaling phase where Pegasystems’ financials should begin to improve going forward. High retention and long customer relationships are testament to the company’s switching-cost-driven narrow moat. 

BPM software allows customers to streamline operations by automating business processes. Pegasystems’ no- and low-code platform allows the business user, rather than a software engineer, to automate the workflow in a way that matches the business need. There are a variety of templates for common uses that customers can draw from to further expedite the automation. Users can also draw from any previous work their company has done on the platform, employing chunks of code many times over. This allows for common processes to be written once and used repeatedly, thereby lowering costs and decreasing the time between process or application updates. The software was initially used in call centres. While customer engagement more broadly remains the primary driver, a wide variety of uses involving many complicated business processes have been brought into the fold. Lastly, the software allows for users to “build for change,” meaning once software-driven processes are in place, they can be changed quickly on the fly so that all similar uses are also updated. 

Pegasystems has long been considered a leader in BPM and a contender in other niches. Management sizes the market at $50 billion, which includes both customer engagement and BPM. It is renowned, that the Pega platform is a high-end solution that larger enterprises with a high level of customer interactions would undertake.

Financial Strength

It is probable Pegasystems is financially sound, perhaps with a negative bias in the short term. The model transition to the cloud is now near the halfway point, suggesting that margins either bottomed in 2021 or perhaps will bottom in 2022 and will recover from there, while revenue growth will similarly accelerate and remain more robust for the next several years. It is foreseen by now software investors have had a chance to observe this pattern many times and recognize it for the better model that it is. It is likely, margins will expand and growth will accelerate and return to a more fully formed financial model in 2024. Management, customers, and investors alike all prefer the predictable subscription model over the lumpy perpetual license model. That said, it is accredited that the uncertainty inherent in reinventing the business. As of Dec. 31, 2021, Pegasystems had $363 million in cash and equivalents, with $600 million in face value convertible notes. It is anticipated free cash flow margins will bottom in 2022 and will improve steadily over the next several years. At the heart of this is the familiar transition to a subscription model. No reason can be seen why operating margin will not expand to at least 20% over time, driving free cash flow margins higher as well. It is likely, that it is possible the company will need to complete a nominal capital raise—less than 1% of the market cap, within the next several years as the model normalizes. In terms of capital deployment, Pegasystems pays a dividend and occasionally makes acquisitions. Acquisitions are typically small technology-driven deals. The company pays a $0.03 per share quarterly dividend which totalled approximately $10 million in both 2020 and 2021. It is renowned it is unusual for a smaller publicly traded software company to pay a dividend. Management has repeatedly reiterated it is committed to paying the dividend.

Bulls Say’s

  • The company has long been a leader in BPM, where uses are proliferating in an effort to increase productivity and lower costs. 
  • Pegasystems has a differentiated product with a rule’s engine, process templates, a low-code development platform, robotics, and integrated customer engagement applications. 
  • Moving to a cloud-driven solution should allow for a yearslong path of margin improvement and much better revenue visibility.

Company Profile 

Founded in 1983, Pegasystems provides a suite of solutions for customer engagement and business process automation. The company’s key offering is the Pega Infinity platform, which combines business process automation with customer engagement applications. 

(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
Dividend Stocks

Telefonica Brasil Posts Solid Customer Growth, but Costs Pressure the Business

Graphic of investment stock market data analysis business

Business Strategy & Outlook

The Telefonica Brasil (Vivo) is one of the strongest telecom carriers in Brazil, vying with America Movil to offer converged wireless and fixed-line services across much of the country. But the market faces several challenges, including stiff competition, a fragmented fixed-line industry, and general economic weakness that has also hurt the value of the Brazilian real in recent years. The plan to carve up Oi’s wireless assets appears to be nearing completion, promising to significantly improve the industry’s structure, cutting the number of wireless players to three. While results will likely remain volatile, Vivo will prosper as Brazilians continue to adopt wireless and fixed-line data services.

Vivo is the largest wireless carrier in Brazil by far, holding 33% of the wireless market, including 37% of the more lucrative postpaid business. The firm generated about 60% more wireless service revenue in 2020 than America Movil or TIM, its closest rivals. The three carriers have agreed to split up the wireless assets of Oi, the distant fourth-place operator that has been in bankruptcy protection. If successful, the transaction would remove a sub-scale player from the industry. With three large carriers remaining, the competition will grow increasingly rational, solidifying the pricing discipline seen recently. Vivo’s share would also expand to about 38%, adding additional scale that should benefit margins and returns on capital.

In the fixed-line business, Vivo has struggled recently. Its share of the broadband business has slipped to 15% from 27% five years ago as it has lost customers in areas where its network is older and less capable and upstarts are investing aggressively to build fiber. Vivo is investing aggressively as well, though, at its own fiber network now reaches nearly 20 million homes, nearly 30% of the country. The firm has numerous initiatives in place, including an infrastructure joint venture, with plans to build to nearly 10 million by the end of 2024, but it remains to be seen how many carriers will be vying for these customers with networks of their own.

Financial Strengths

Vivo’s financial health is excellent, as the firm has rarely taken on material debt. The net debt load increased to BRL 4.4 billion following the acquisition of GVT in 2015, but even this amounted to less than 0.5 times EBITDA. Cash flow has been used to allow leverage to drift lower since then. At the end of 2021, the firm held BRL 500 million more in cash than it has debt outstanding, excluding capitalized operating leases. Even with the capitalized value of operating lease commitments, net debt stands at BRL 10.4, equal to 0.6 times EBITDA. Even after funding its share of the Oi transaction and assuming no incremental benefit to EBITDA, net financial leverage would stand at only 0.8 times.

Parent Telefonica has control of Vivo’s capital structure. While Telefonica’s balance sheet has improved markedly in recent years, the firm still carries a sizable debt load and faces growth challenges in its core European operations. Vivo aims to pay out at least 100% of net income in dividends and the distribution has averaged BRL 5.5 billion annually over the past three years. The firm plans to pay out BRL 6.3 billion in 2022. If the business hit a rough patch, though, the dividend may not prove to be in shareholders’ interest relative to other uses of cash. For Telefonica, though, moving cash up to the parent directly helps its balance sheet.  Fortunately, dividend growth isn’t sacrosanct. Reported net income declined in 2019 and the payout in 2020, based on the prior year’s income, declined about 15%. The dividend declined another 7% in 2021 based on 2020 earnings. These cuts have come despite ample free cash flow generation. To calculate the dividend would have consumed only 55% of 2020 free cash flow if the 2019 payout had been maintained. Vivo also has a share buyback program but repurchases have been minimal recently. The firm repurchased BRL 496 million in 2021, by far it largest outlay over the past several years. The buyback in 2022 is again expected to be around.

Bulls Say

  • Vivo is the largest telecom carrier in Brazil and benefits from scale-based cost advantages in both the wireless and fixed-line markets.
  • The firm is well-positioned to benefit as consumers demand increased wireless data capacity. Its network in Brazil is first-rate and its reputation for quality is second-to-none.
  • Owning a high-quality fiber network enables Vivo to offer converged services throughout much of the country, while buttressing its wireless backhaul, improving network speeds and capacity.

Company Description

Telefonica Brasil, known as Vivo, is the largest wireless carrier in Brazil with nearly 85 million customers, equal to about 33% market share. The firm is strongest in the postpaid business, where it has 50 million customers, about 37% share of this market. It is the incumbent fixed-line telephone operator in Sao Paulo state and, following the acquisition of GVT, the owner of an extensive fiber network across the country. The firm provides internet access to 6 million households on this network. Following its parent Telefonica’s footsteps, Vivo is cross-selling fixed-line and wireless services as a converged offering. The firm also sells pay-tv services to its fixed-line customers.

(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
Dividend Stocks

Future Bumper Harvest Set To Buoy Lucrative Supply Chains For Graincorp Ltd.

Business Strategy and Outlook

GrainCorp enjoys significant market shares in grain storage, handling, and port elevation services along the eastern seaboard of Australia. Earnings are heavily affected by seasonal conditions, but the diversification into oilseed crushing and refining reduces earnings volatility and provides growth opportunities. However, it seems as if the firm has not carved an economic moat, and forecast returns on invested capital to trail the firm’s cost of capital over the long term. 

GrainCorp’s core Australian grain storage and logistics business is heavily reliant on favourable weather patterns. Accordingly, it has had some strong years during bumper grain harvests, but with a high fixed-cost base, even after substantial asset reduction, earnings can quickly evaporate in poor seasons. While the company’s upcountry storage network would be difficult to replicate from scratch, on-farm storage is a competitive threat, particularly in drought years when a larger share of the crop moves direct from farm to customer, bypassing GrainCorp’s storage network. Port competition has also increased in recent years, and regulation remains high. In a bumper harvest year, GrainCorp has historically handled up to 60% of the east-coast grain crop and 30% of the country’s total grain exports, but in a poor year, these market shares can trend closer to 30% and below 5%, respectively. GrainCorp’s market share of the eastern grain crop is projected to stabilise at levels near 40% over time, and export share at 21%, representing an average crop year. 

Beyond storage and logistics, the grain marketing segment competes domestically and internationally against other major commodities trading houses such as Cargill and Glencore. This is a competitive market, and GrainCorp does not seem to have any advantage relative to these large global players. The firm will likely remain at the mercy of Australian grain competitiveness relative to global pricing. Similarly, GrainCorp’s oil crushing and refining business remains competitive. While profitability in this segment is expected to improve due to cost-savings measures and ongoing growth, the segment fails to possess durable competitive advantages.

Financial Strength

GrainCorp’s capital structure is reasonable. It comprises debt and equity, with noncore debt associated with the funding of grain marketing inventory. As a result of swings in crop prices, GrainCorp’s cash flow and working capital requirements can be volatile, so the company will need to drawdown on debt on demand. As at March 31, 2022, core debt (net debt less commodity inventory) was cash-positive and total net debt was AUD 2 billion. There’s a risk that earnings pressure in drought-affected years could test debt covenants with its bank lenders. The primary metrics are its net debt/capital gearing ratio and EBITDA/interest ratio. 

Gearing ratios can be volatile, given the swings in inventory levels. The net debt gearing ratio (net debt/net debt plus equity) sat at over 50% as at March 31, 2021 due to high inventory levels. Accordingly, core debt gearing (core debt/core debt plus equity) was negligible. Management doesn’t disclose the minimum EBITDA/interest ratio. In fiscal 2020, this ratio was about 4 times on an adjusted basis, but improved to 13 times in fiscal 2021. Improvement is anticipated to an average of around 20 times over the next five years, as debt levels decline and interest expense moderates.

Bulls Say’s

  • With strategic processing, storage, and transportation assets, GrainCorp’s size gives the company scale advantages over regional competitors. 
  • Global thematics, such as increased food demand, particularly in Asia, should benefit agribusinesses such as GrainCorp. 
  • Despite divesting the malt business, GrainCorp has entered into a new grains derivative contract which assists with smoothing out earnings through the cycle. 

Company Profile 

GrainCorp is an agribusiness with an integrated business model operating across three divisions. The company operates the largest grain storage and logistics network in eastern Australia. GrainCorp provides grain marketing services to all major grain-producing regions in Australia, as well as to Canadian and U.K. growers. The company has also diversified into edible oil refining and supply, and bulk liquid storage.

(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
Dividend Stocks

Apple’s Capital Management – $90bn buyback announced + dividend increased

Investment Thesis:

  • High barriers to entry. Strong strategic position in the rapidly growing global smartphone market especially with high end consumers. Loyal consumer base resulting in lower competitive pressure, and higher pricing power.
  • Recent share price de-rating is likely factoring in near-term headwinds. 
  • Large cash balance and strong free cash flow supporting share buyback and dividend payout.
  • Leading positions in iPhone (~55.0% of revenue); iPads (~7.0%); and Macs (~9.0%)
  • Other products (such as wearables and home products) – APPL seized the leading position off the back of a surge in smartwatch sales in a market expected to grow single digit till 2022 and double digit thereafter.
  • Strong senior executive team reducing (not totally eliminating) key man risk. 

Key Risks:

  • Geo-political tensions. The trade war between the USA and China poses a threat to the company’s future profits. AAPL currently obtains components from single or limited sources (mostly China), the Company is subject to significant supply and pricing risks. Also, Greater China is a major market contributing to approximately 20% (1H22) of total revenue and any retaliatory efforts from Beijing could impact those sales.
  • Whilst there are only a handful of competitors, the competition is Intense from Android manufacturers. The most notable competitors in the smartphone market (which contributes 50% of Apple’s revenues) are the Korean giant Samsung and two rapidly growing Chinese smartphone players in Huawei and Xiaomi. On raw performance specs (i.e., camera, maps, screen size, charge time, etc.), one may assert that AAPL devices are technically inferior to a handful of Android devices.
  • Movements in U.S. dollar (USD). The greenback’s strong gain recently (due to currency’s safe-haven appeal in the light of the ongoing coronavirus pandemic and Russia-Ukraine war), meaning foreign currency earnings of AAPL can be worth less when translated back to USD. The weakness in foreign currencies relative to USD will have an adverse impact on net sales.
  • Adverse regulatory policies. 

Key Highlights:

  • Strong shareholder returns with the Company returning ~$27bn ($3.6bn in dividends + $22.9bn in buybacks) during 2Q22. The Board authorized an additional $90bn for share repurchases and increased 2Q22 dividend by +5% to $0.23 a share with plans for annual increases in the dividend going forward.
  • Ample liquidity with $193bn in cash and marketable securities and $120bn in debt, resulting in a net cash position of $73bn.
  • Revenue increased +9% YoY to $97.3bn, setting new 2Q records in the Americas, Europe and greater China, with Product revenue up +7% YoY to $77.5bn and installed base of active devices reaching an all-time high for all major product categories as well as geographic segments, and Services setting an all-time revenue record of $19.8bn, up +17% YoY with 2Q records in every geographic segment and services category as the Company continued to improve the quality and increased its offerings. AAPL plans to introduce tap-to-pay on iPhone (way for businesses to accept contactless payments) across the U.S. by end of FY22.
  • Gross margin increased +120bps YoY to 43.7%, with favourable mix partially offset by unfavourable FX, with Products margin up +30bps YoY to 36.4% and Services margin up +250bps YoY to 72.6%.
  • Net income of $25bn (up +6% YoY) and diluted EPS of $1.52 (up +9% YoY) were 2Q records. 

Company Description:

Apple Inc. (AAPL) designs and manufactures media devices and personal computers (Macs), and sells a variety of related software, services, accessories, networking solutions and third-party digital content and applications. The company leads the world in innovation with iPhone, iPad, Mac, apple watch and Apple tv.

(Source: Banyantree)

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.

Categories
Technology Stocks

Link’s First-Half Result a Formality as Acquisition inches Closer (Corrected)

Business Strategy & Outlook: 

Link Administration has created a narrow economic moat in the Australian and U.K. financial services administration sectors via its leading positions in fund administration and share registry services. Client retention rates exceed 90% in both markets, underpinned by inflation-linked contracts of between two and five years. The capital-light nature of the business model should enable good cash conversion, regular dividends, and relatively low gearing. Earnings growth prospects are supported by organic growth in member numbers, industry fund consolidation, and continued outsourcing trends. The company was formed via numerous acquisitions made since 2005 under the ownership of private equity firm Pacific Equity Partners, which sold its remaining holding in the company in 2016. The Australian fund administration business, which constitutes around a third of group revenue, to be the strongest of Link’s businesses. 

Link usually comprises around three fourths of fund administration customer costs, which creates material operational and reputational risks to switching providers. Contract lengths of between three and five years, along with six to nine months of lead time to change provider, also create barriers to switching. Switching costs are evidenced by Link’s recurring revenue rate of around 90% and client retention rate of over 95%. Six of Link’s 10 largest clients have been with the company for over 20 years. Link’s only significant competitor in fund administration is Marsh & McLennan-owned Mercer, which has a 10% market share following its acquisition of Pillar, previously the third-largest provider, in 2016. Both the companies to compete aggressively for future outsourcing contracts, which may come from the 60% of the market that is currently serviced in-house. However, around 30% of the in-house segment comprises the four major Australian banks and AMP, which have a reasonably low probability of outsourcing. The remaining 30% comprises a combination of government-owned entities and relatively small superannuation funds, which are likely to have outsourcing lead times of months or years.

Financial Strengths:

Link’s balance sheet is in good shape with a net debt/EBITDA ratio of around 2.6 as at Dec. 31, 2021, which is within the company’s target range of 2 to 3. From an interest coverage ratio perspective, Link has a manageable interest coverage ratio of around 14.

Bulls Say:  

  • Link’s EPS to grow at a CAGR of 9% over the next decade, driven by a revenue CAGR of 6% per year, in addition to cost-cutting and operating leverage.
  • Link’s Australian fund administration market share grows by 2.5 percentage points to 32.5% over the next five years.
  • The capital-light nature of the business model should enable regular dividends, and low financial leverage creates the opportunity for debt-funded acquisitions.

Company Description:

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

(Source: Morningstar)

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
Dividend Stocks

Majority Owner Hochtief to Bid AUD 22 in Tilt for Full Control of Cimic

Business Strategy & Outlook: 

Cimic has developed the ability, reputation, and balance sheet strength to undertake numerous large-scale contract mining and construction projects simultaneously and in different countries. Few companies, apart from Cimic, in the domestic contract mining and construction market have the reputation, skill, knowledge, or capability to undertake challenging megascale mining and infrastructure projects. But excess returns of the recent past look to be a function of the China-driven commodities boom. Traditionally, Cimic’s annual operating revenue is split 60%-65% engineering and construction work, 20%-25% contract mining and 10%-15% services and property development work. Cimic’s contract mining business is highly capital-intensive but inherently lower risk than construction. Domestic and international mining contracts are normally schedule-of-rates style, with Cimic assuming risk on productivity and volumes. 

Cimic lowers operating risk on contract mining work by mainly undertaking open-cut mining at coal and iron ore sites with quality deposits for large resource companies. However, competition can be fierce for new contract mining work and renewals. Despite relatively stable cash flows, the consequences of problems at a few large-scale construction projects can negatively affect the company’s overall operating cash flow and earnings. Large domestic infrastructure construction projects are predominantly fixed-price/fixed-time contracts, or alliance style with shared risk. Cimic’s project tenders incorporate a theoretical profit margin (pretax, overheads and depreciation) of at least 10%, providing a margin of safety. However, in fiscal 2011, Cimic incurred a net loss, primarily as a result of large losses on just two major infrastructure construction projects and at the company’s Middle East construction joint venture. Cimic exited the Middle East in early 2020, wearing AUD 700 million in post-tax financial guarantees. Cimic has numerous large-scale mining, infrastructure and service projects in Australia and internationally. Transparency on individual contracts/projects is low, feeding in to high uncertainty rating.

Financial Strengths: 

Cimic is in strong financial health. The company finished December 2021 with AUD 502 million in net debt, leverage (ND/(ND+E)) of 32% and net debt to EBITDA a comfortable 0.6. The company sold a 50% stake in its Thiess mining contracting business to the U.K.’s Elliot in 2020, the transaction generating AUD 2.1 billion net cash proceeds. Cimic’s capital intensity is tempered with exposure to the equipment heavy mining contracting sector lessened. This should enhance the rate of cash conversion in future. In addition to the cash proceeds, the Thiess sell down reduces Cimic’s lease liability balance by approximately AUD 500 million. Net operating cash flow exceeded AUD 1.0 billion in each of the nine fiscal years preceding 2019, and free cash flow was positive in each of the last seven of those fiscal years. But net operating cash flow fell to AUD 927 million in 2019, not helped by one-off BIC Contracting exit costs in the Middle East and has been negative through to June 2021 due to COVID-19 and unwind in factoring. Traditionally, the company has a strong balance sheet and cash flow, which provides the necessary flexibility to tender for large infrastructure and mining contract projects. The cashflow to turn positive as the economy exits from COVID-19.

Bulls Say:  

  • Cimic is the dominant infrastructure construction and mining services company in Australia and competes against only a small number of companies. Cimic holds AUD 36 billion of work in hand and a reasonably positive outlook. 
  • Cimic has a solid long-term reputation for complex project design, execution and delivery.
  • Cimic’s new approach is to focus on risk management including tender accuracy, risk identification, satisfactory time allowance, adequate pricing risk and exact project delivery.

Company Description:

Cimic is Australia’s largest contractor, providing engineering, construction, contract mining services to the infrastructure, mining, energy, and property sectors. The business structure consists of construction, contract mining, public-private partnerships, and property, along with 45%-owned Habtoor Leighton. Cimic has exited its Middle East business. ACS/Hochtief owns 79% of Cimic.

(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
Technology Stocks

Bio-Techne Buoyed by Growing Demand for Cell and Gene Therapies, Long-Term Goals on Track

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

Business Strategy & Outlook

Bio-Techne is a market leader in proteins for the pharma, biotech, academic, and diagnostic markets and maintains strong market positioning in antibodies and testing controls for diagnostic partners. The firm’s market leadership in proteins has not come at the expense of pricing, and Bio-Techne is often the highest-priced provider of proteins and antibodies. Bio-Techne is likely to capitalize on current high growth of biologics in the 6%-8% range, which have been outpacing the mid-single-digit growth of traditional small molecules. Cell and gene therapies require protein inputs, and Bio-Techne’s reputation for quality in a market with few regulatory quality minimums help Bio-Techne win new business despite relatively robust competition. To have long-term success, Bio-Techne needs to maintain a dominant position in proteins, and at the same time expand its presence in genomics, without compromising on quality standards across the firm’s large protein

portfolio.

Bio-Techne’s strategy involves prioritizing top line growth with manufacturing capacity investment and large-scale customer deals, while complementing organic growth with meaningful

acquisitions. The company is heavily focused on gaining a foothold in genomics, and has seen some early success with Applied Cell Diagnostics’ RNA-ish and Exosome’s liquid biopsy ExoDx, two technologies that are in the process of being scaled to the market after being acquired within the last five years.

Though the coronavirus pandemic initially depressed sales, with lab closures early in 2020 and uncertainty on academic research funding, Bio-Techne has also seen some upside. The firm offers

direct-to-home liquid biopsy tests and has seen high demand for proteins used for COVID-19 vaccines and treatments. The recent approval of the ExoDx biopsy was well-timed, given that the test

can be sent directly to a patient’s home for urine collection following approval from a telehealth doctor. While the ongoing pandemic has been a net negative, expanded capacity of COVID-19 testing and high demand for protein inputs have mostly offset temporary headwinds of lab shutdowns and research cuts.

Financial Strengths 

Bio-Techne has solid financial strength. Though leverage had temporarily increased from acquisitions, and debt/adjusted EBITDA reached a multiyear high of 2.25 times in 2019, Bio-Techne now has net debt leverage of about zero. Barring any large acquisitions, leverage to remain well below 2.0 times over the coming years. Bio-Techne’s healthy interest coverage ratio also indicates an appropriate level of debt, with the firm maintaining an operating income/interest expense ratio in the high-single digits, with the ratio ending 2020 at around 15 times. The interest coverage well above 20 times over the next five years. Bio-Techne’s primary source of funding for acquisition activity is a $600 million revolving credit facility, established in August 2018. This credit facility can be extended to an additional $200 million, and the company also took out a term loan of $250 million, with both facilities set to mature in August 2023. As of year-end 2020, Bio-Techne had $344 million of long-term debt, split between the term loan and revolving facility. The additional lending capacity of the credit agreement gives Bio-Techne an appropriate level of flexibility to make capital allocation decisions, and lenders appear to have high confidence in the firm’s ability to pay interest and principal on the debt, with the credit agreement allowing for a maximum interest rate of 75 basis points over Libor for standard lending.

Bio-Techne has generated good levels of operating cash, with consistent operating cash flow above $120 million in each of the last nine years, and the cash flow averaging $442 million in the next five years. We also expect free cash flow to average $353 million over that period.

Bulls Say

  • While private payers currently do not cover the ExoDx biopsy test, getting reimbursement approvals along with expanded indications could allow for product revenue upward of $100 million, compared with under $50 million currently.
  • Bio-Techne is set to benefit from high market growth of biologics, which require protein inputs, and regulatory approvals of biosimilars could be an additional tailwind for protein growth.
  • Funding for academic health research through the National Institutes of Health could increase in a post pandemic world, and could offset state budget cuts in academia.

Company Description

Based in Minnesota, Bio-Techne is a life sciences manufacturer supplying consumables and instruments for the pharma, biotech, academic, and diagnostic markets. The company reports in two segments, protein sciences (75% of revenue), and diagnostics and genomics (25%). The protein-focused segment makes equipment and associated consumables for protein characterization and analysis and sells antibodies for research and clinical purposes. In diagnostics, Bio-Techne provides controls and calibrators for diagnostic manufacturers and has a portfolio of diagnostic oncology assays. The United States accounts for about 55% of revenue, and the firm also has operations in EMEA (20% of sales), the U.K. (5%), and APAC (15%), with the rest of the world accounting for the remaining 5%.

(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
Shares Small Cap

The growth that the Western Union Co is seeing in digital transfers does not appear to be leading to strong overall growth

Business Strategy and Outlook

Western Union’s primary macroeconomic exposure is to employment markets in the developed world, as the search for better economic opportunities is the fundamental driver for money transfers. While conditions have improved over time in the United States and Europe, a region that is about equally important for Western Union as the U.S., growth remains modest, with new entrants adding to the issues for legacy operators like Western Union. At this point, it is unlikely for a catalyst to improve the situation. Pandemic-related headwinds appear to be lingering, and the decision to exit Russia will add pressure. It is still anticipated that Western Union has a wide moat based on its sizable scale advantage, but with a stagnant top line, the value of the moat over the next few years could be questioned. 

Another major issue for Western Union is the industry shift toward electronic methods of money transfer. The company has been actively building out its presence in electronic channels in recent years to adapt to the change in the industry. Western Union saw a sharp spike in digital transfers at the beginning of the pandemic, and growth has remained strong. Western Union achieved a 32% year-over-year increase in transaction growth in 2021 as this area of the company’s business jumped to about a quarter of revenue. It is alleged the firm’s aggressive approach is the best strategy as Western Union positions itself to maintain its scale advantage despite the shift. In analysts’ opinion, scale and market share across all channels will be the dominant factor in long-term competitive position, and Western Union appears to be maintaining its overall position. However, the growth that the company is seeing in digital transfers does not appear to be leading to strong overall growth, and this situation is unlikely to change.

Financial Strength

Western Union’s capital structure is fairly conservative, as management sees a strong credit profile as an advantage in attracting agents. The company carried $3.0 billion in debt at the end of 2021, resulting in debt/EBITDA of 2.3 times; this is a reasonable level, in experts’ reasoning, given the stability of the business. Western Union also typically holds a substantial amount of cash. Net debt at the end of 2021 was approximately $1.8 billion, and it is held, that the company might hold a net debt position of about $2 billion over time. Given recent changes to tax laws, it’s possible Western Union might not hold as much cash as it has historically, as it will no longer incur a tax penalty upon repatriation. This could help free management’s hand, as the company historically has returned the bulk of its free cash flow to shareholders through stock repurchases and dividends.

Bulls Say’s

  • The demographic factor that has historically driven industry growth–namely, the differential between population growth in developing and developed countries–remains in place for the foreseeable future. 
  • Western Union didn’t see a major drop-off during the last recession or the pandemic, highlighting the stability of the business. 
  • While the motives for immigrants to relocate to wealthier countries are well understood, developed countries also have incentive to open their borders, as negligible native population growth makes immigration a necessity for long-term GDP growth.

Company Profile 

Western Union provides domestic and international money transfers through its global network of about 500,000 outside agents. It is the largest money transfer company in the world and one of only a few companies with a truly global agent network. 

(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
Dividend Stocks

Maintaining the Fair Value Estimate of $26 for KeyCorp After First-Quarter Earnings

Business Strategy & Outlook: 

KeyCorp was hurt during the financial crisis largely because of its ventures into higher-risk commercial real estate lending in out-of-footprint states. Since the crisis, KeyCorp has wound down most of its construction-related commercial real estate business and refocused on its core corporate banking operations and capital markets services. With increasing credit quality and declining credit-related costs, along with significant operational improvements, KeyCorp has returned to healthy profitability. The bank’s First Niagara acquisition back in 2016 has also helped drastically improve the bank’s operating efficiency and scale. KeyCorp has an odd geographic mix, as Ohio, New York, and Washington state are its three largest deposit markets. While this provides some protection from a localized downturn, it has also made hitting ideal branch and deposit concentrations more difficult. The First Niagara acquisition has improved many of these metrics for KeyCorp in New York (First Niagara was headquartered out of Buffalo), such as deposits per branch and average metropolitan statistical area market share. KeyCorp also gained access to some key new product sets, most notably residential mortgages, which remains a key growth driver for the bank today. The bank’s latest investments into more technologically forward endeavors, including the acquisitions of HelloWallet, Laurel Road, AQN Strategies, and XUP Payments. Laurel Road is a key growth engine for the bank today, using a digital national platform approach. KeyCorp’s noninterest income comes primarily from investment banking and asset and trust management services. While noninterest income did not grow substantially for the decade prior to 2019, the bank has turned a corner here. KeyCorp is expanding its relatively new credit card income base as well as its own mortgage and capital markets operations. These efforts have largely paid off, and the fees will be consistently higher from 2020 forward than they were for the previous decade. The bank shall continue to remain very competitive in its core middle-market niche, while also building out its focused retail operations.

Financial Strengths:

KeyCorp is in adequate financial health. The bank has performed well through the pandemic, with credit costs being very manageable. The bank’s common equity Tier 1 ratio of 9.4% as of March seems adequate to us. The capital-allocation plan remains fairly standard for KeyCorp, with a focus on investing in organic growth and extra capital being used to fund share buybacks and pay a dividend. Management targets a 40%-50% dividend payout ratio with much of the rest used for share buybacks if no organic investment opportunities present themselves. Bolt-on acquisitions also remain a possibility.

Bulls Say:

  • A strong economy and higher rates are all positives for the banking sector and should propel revenue and profitability higher for KeyCorp. 
  • The bank’s extra growth from its Laurel Road initiatives and more growth for its capital markets segment should continue for the foreseeable future.
  • Key’s investment banking and capital markets offerings allow the bank to win business from corporate clients that seek more robust offerings but are too small to attract attention from bulge-bracket firms.

Company Description:

With assets of over $170 billion, Ohio-based KeyCorp’s bank footprint spans 16 states, but it is predominantly concentrated in its two largest markets: Ohio and New York. KeyCorp is primarily focused on serving middle-market commercial clients through a hybrid community/corporate bank model.

(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
Technology Stocks

Paycom Continues Impressive Growth Trajectory During Q1 2022; $388 FVE Maintained

Business Strategy & Outlook:

Paycom’s unified platform appeals to midsize and enterprise clients who prefer an all-in-one payroll and HCM solution. The company’s platform is supported by a single database, which provides a single source of truth and allows efficient software development and maintenance. Unlike competitors, Paycom discourages data integrations to third-party providers but instead incentivizes clients to contain their HCM solutions within its unified platform by offering add-on modules including time and attendance and benefits administration. In practice, new clients may consolidate their payroll and HCM solutions from multiple providers to an all-in-one solution by Paycom. The company is squarely focused on driving greater automation and employee self-service, supported by complimentary analytics tools for clients and the recent roll out self-service payroll module, BETI. 

Paycom will continue to take market share of the growing payroll and HCM industry through industry consolidation and capitalizing on the shortfalls of competitors. The company has reported impressive growth to date, reflecting an ability to win clients and demonstrating how the cost and efficiency benefits of streamlining payroll and HCM solutions to a single platform can overcome inherent client switching costs. It is anticipated Paycom’s average revenue per client, or ARPC, will increase at a CAGR of 7% due to a gradual shift upmarket and from taking greater share of wallet through upselling existing and new modules. Paycom’s target market has shifted upwards over several years, with the company formally lifting the upper bound to 10,000 in fiscal 2021, from 2,000 in fiscal 2013. This shift paired with increased module uptake has led to an approximately 18% increase in ARPC over the same period. While the Paycom’s average client size to increase, its offering will be less appealing to mega enterprises who typically prefer to integrate best of breed solutions, by limiting the upmarket upside for Paycom.

Financial Strengths:

Paycom is in a strong financial position. At the end of fiscal 2021, Paycom had a net cash position of over $240 million and reported about $27 million of long-term debt, which is primarily associated with construction activity at its corporate headquarters. The company has access to at least $75 million of liquidity under a secured term loan and revolving credit agreements. Under these agreements, Paycom is subject to certain operating and financial covenants including restrictions on incurring further debt, issuing distributions and must maintain an EBITDA to fixed charge ratio of no less than 1.25 times and funded indebtedness of no greater than 2 times EBITDA. Paycom to maintain a net cash position, to comfortably cover interest on outstanding debt and to remain compliant with these covenants over the forecasted period. Paycom does not pay dividends but returns capital to shareholders through an ongoing share repurchase program. The future share repurchases will be partly offset by the regular issuance of shares under Paycom’s employee stock compensation and purchase plan. While Paycom operates a capital light business model with strong free cash flow generation potential, the company will continue to not pay dividends for the foreseeable future and instead invest excess cash in growth through primarily organic investments.

Bulls Say:

  • The increasing employee usage and employee self-service will entrench Paycom’s platform further into a client’s business, increasing client stickiness.
  • Increasing regulatory complexity under a U.S. Democratic Administration should create tailwinds for the payroll and HCM industry.
  • Paycom’s employee self-service payroll BETI is pushing the envelope amid an industry shift toward greater employee usage and the consumerization of payroll and HR software.

Company Description:

Paycom is a fast-growing provider of payroll and human capital management, or HCM, software primarily targeting clients with 50-10,000 employees in the United States. Paycom was established in 1998 and services about 16,000 clients, based on parent company grouping. Alongside its core payroll software, Paycom offers various HCM add-on modules including time and attendance, talent management, and benefits administration.

(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.

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