Tag: Recommendations

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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.

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

Henkel’s CEO Carsten Knobel updated the company’s midterm ambition following the announcement of the customer unit formation

Business Strategy and Outlook

In January 2022, Henkel announced the decision to combine two of its business units (beauty care, and laundry and home care) into one consumer unit in an attempt to achieve more synergies in its customer and channel execution after years of subpar performance, especially in North America. While it is held that operating an overall larger portfolio is important in driving customer management, it is probable to have limited upside in terms of growth as there is little marketing and innovation expertise to be shared between the units. Moreover, large competitors in the space are moving in the opposite direction, with Unilever for instance recently announcing that it would move from three divisions to five business groups, with each responsible for end-to-end strategy and execution. 

Nonetheless, Henkel’s CEO Carsten Knobel updated the company’s midterm ambition following the announcement of the customer unit formation. The firm now targets midterm organic sales growth of 3%-4%, up from 2%-4% previously, along with mid- to high-single-digit adjusted EPS growth at constant currencies, free cash flow expansion, and an adjusted EBIT margin of 16%. Notably, this level of adjusted EBIT margin falls below the peak level of 18% achieved in 2018, signalling that management is recognizing that some of the recent higher investment in marketing and innovation would not be temporary, with limited margin opportunities remaining. Given the firm’s track record, it is projected a 16% medium-term adjusted EBIT would imply an improvement in competitiveness in the consumer space, which is not seen to be likely, at this time. That applies to the top line as well, and it is alleged that the measures announced thus far do not warrant an increase in growth expectations. In order to hit its midterm ambitions, it is grasped that more drastic portfolio decisions must be made, which should include further trimming of the brand portfolio, a clear plan to address the underperformance in North America and in the beauty care segment, as well as providing more clarity regarding the adhesive’s unit, which has been overlooked to some extent and unjustly punished for underperformance on the consumer side.

Financial Strength

Henkel has a strong balance sheet, and it has historically been run with very conservative levels of leverage. Even at the time of the acquisition of the Sun Products corporation in 2016, which was financed with debt, debt/EBITDA only increased to about 1 time. It has remained fairly stable at around 1 time since then, with net debt/EBITDA declining, averaging around 0.5 times over the last 5 years, significantly below large-cap consumer staples peers for which the average is closer to 2.0 times. Acquisitions have declined in importance since the Sun Products purchase, but remain an integral part of management’s stated strategy. To this point, one of the reasons given for the formation of the Henkel Consumer Brands segment was to enable the company to step up its active portfolio management, both in terms of divestment or discontinuations of noncore brands and businesses, and by creating a stronger basis for acquisitions across the consumer space. The restructuring of the business will only be completed in 2023, so it is unlikely to see a massive transformative initiative until at least 2024. In the absence of acquisitions, however, Henkel is unlikely to need to raise capital, and even given experts’ unambitious mid-single-digit estimate of EBITDA growth over analysts’ five-year forecast period should ensure that the net debt/EBITDA ratio remains controlled for the foreseeable future, all else equal.

Bulls Say’s

  • The combination of the beauty care and the home care segments under one roof in the consumer segment should result in more rapid and material portfolio decisions. 
  • Henkel offers plenty of balance sheet optionality and should be able to pursue targets ranging from bolt-on to transformative. 
  • Henkel’s clear market leadership in adhesives technologies through its differentiated and customizable offering gives it a unique position to benefit from secular trends around lighter yet strong materials and energy efficiency.

Company Profile 

Two distinct customer groups comprise Henkel. The consumer segment (around 50% of consolidated 2021 sales) is laundry and home care, including the Persil and Purex laundry detergent brands, and beauty care, including the Schwarzkopf brand in hair care, and the Dial brand in hand soap. The adhesives technologies segment makes up the remaining 50% of sales. Sales from Western Europe accounted for 30% of the firm’s consolidated total in 2021, while Asia-Pacific and North America accounted for 17% and 25%, respectively. 

(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

Centuria Industrial REIT threatened by declining disparity between capitalisation rates and bond yields

Business Strategy and Outlook

Centuria Industrial REIT is an externally managed Australian real estate investment trust. It owns a portfolio of 84 industrial properties, including distribution centres, manufacturing facilities, and data centres. About 82% of the portfolio by value is in urban infill areas of the major cities, with good prospects for rental growth and potentially redevelopment over the long term for higher and better use, including multi storey industrial, mixed use, residential, healthcare, or bulky goods retail. 

Revenue is defensive and growing. The trust earns rental income from a wide variety of tenants across multiple industries. Weighted average lease term is long, with typically 5% to 15% of leases expiring each year. In fiscal 2022, close to 80% of leases have fixed rent reviews averaging 2.8%, with most other leases linked to CPI inflation. Excluding a handful of properties with very long leases, portfolio rents are close to 10% below market, suggesting positive rent reversion as leases expire. All this adds up to a positive outlook for revenue. 

As with other REITs, operating profit margins are high, but operating costs tend to grow in line with revenue. The trust’s main costs are direct property expenses (which are mostly recovered from tenants under net leases), responsible entity fees, and interest expense. Responsible entity fees paid to the external manager Centuria Capital Group (ASX: CNI) are linked to portfolio size and have tripled in the past five years on rising property values and acquisitions. The trust’s strategy is relatively aggressive. Although the current level of financial leverage is acceptable,  the distribution payout ratio exceeds underlying earnings, interest rate hedging is limited, and management plans to undertake more acquisitions despite being late in the property cycle.

Financial Strength

Centuria Industrial REIT is in sound financial health. At December 2021, gearing was 31%, toward the bottom of its 30% to 40% target range and well below the 50% covenant limit. Likewise, interest cover of 5.7 times is comfortably above the 2 times covenant limit. These measures have been aided by extraordinarily low interest rates and high property values. Other credit metrics appear more aggressive, though are not a major concern. For example, net debt/EBITDA of 7 to 8 times for the medium term is forecasted, broadly in line with most AREIT peers. The trust has a Baa2 issuer credit rating from Moody’s Investors Service. Average debt duration is relatively long at 4.8 years and the trust has only modest debt maturities in the next couple of years. But limited interest rate hedging means the trust is exposed to rising interest rates–weighted average hedge maturity is 2.6 years. The trust is expected to pay out about 95% of funds from operations, which is aggressive as FFO ignores such things as maintenance capital expenditure, leasing incentives, and debt establishment costs. Distributions are anticipated to exceed underlying earnings by about 10%, which could be unmaintainable if property values stop rising. The trust’s portfolio has grown rapidly via acquisitions, requiring substantial equity raisings. Units on issue have increased more than six-fold since 2014.

Bulls Say’s

  • Revenue growth is underpinned by long leases with fixed or CPI-linked rent reviews. 
  • Very low market vacancies in Sydney and Melbourne suggest strong re-leasing spreads. 
  • About 80% of the portfolio is in urban infill areas, which benefit from supply constraints and superior demand from industrial tenants because of good access to customers and employee bases.

Company Profile 

Centuria Industrial REIT owns a AUD 4 billion portfolio of industrial properties, including distribution centres, manufacturing facilities, and data centres. Melbourne and Sydney are its biggest markets at more than a third of portfolio value each, followed by Brisbane, Perth and Adelaide. The trust is externally managed by Centuria Capital Group. 

(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

Vivendi Looks to Canal+ and Havas for Growth with Further M&A on the Horizon

Business Strategy & Outlook:

Vivendi’s transformation into a pure-play media firm, completed in 2014, left it with two primary business units: Canal+, the largest pay-TV company in France, and Universal Music Group, the largest global music label. However, controlling shareholder Vincent Bollore has dragged Vivendi back to its inglorious past as a conglomerate, exemplified by the purchases of Havas, the world’s sixth-largest ad agency holding company, and Editis, a French-language book publisher. Bollore also led the spinout of UMG, the firm’s crown jewel, in September 2021 with Vivendi holding on to a 10% stake in the music label. As a result of the UMG transaction, Canal+ is now the largest segment for Vivendi, representing 60% of revenue. While Canal+ appears to be returning to growth after years of decline, the core French pay-TV business remains a drag on growth. The growth for Canal+ will continue be driven by overseas operations via subscriber growth and new country launches. 

Canal+ is attempting to transition from a traditional pay-TV business to a content aggregator. Companies that depend heavily on buying or aggregating content from other creators may find themselves squeezed, particularly in markets with multiple aggregators. Now the second-largest segment with roughly 25% of revenue, Havas is heavily leveraged to Europe and North America, which account for over 80% of revenue. Havas competes against larger players in these regions; the only GDP-level growth in these mature markets and further expansion into Asia-Pacific and Latin America, largely via acquisitions of local agencies. Editis now generates roughly 10% of total revenue for Vivendi. The firm is the second-largest French-language publishing group, with 50 publishing houses covering everything from children’s books to popular literature to dictionaries to manga. 

Financial Strengths:

While Vivendi has done an admirable job of cleaning up the mess from the early 2000s, it remains in flux in terms of how to use its cash and where it invests. The large number of divestitures, including the sale of 30% of Universal Music, over the last few years has left the company with a net debt position of only $1.9 billion as of June 2021. However, management continues to use cash to buy stakes in firms in peripheral industries such as the Telecom Italia and Mediaset. The firm will look for additional acquisitions over time to releverage the balance sheet. The firm shall rush into an acquisition and overpay for it.

Bulls Say:

  • The spinout of Universal Music Group should reduce the conglomerate discount that has plagued the stock.
  • StudioCanal is a leading studio that benefits from the increased global demand for French-language original content.
  • Vivendi will return much of the cash from the UMG sale to shareholders via special dividends.

Company Description:

Vivendi’s transformation into a pure-play media firm was completed in 2014, but recent acquisitions and the spinout of Universal Music Group have again changed the firm. The company now operates multiple divisions with one very large core segment: Canal+, a leading producer and distributor of film and TV content in France, produces over 80% of revenue. It also owns Havas, the world’s sixth-largest ad agency holding company; Editis, a French-language book publisher; Gameloft, a mobile game publisher; and minority stakes in multiple companies in Europe.

(Source: Morningstar)

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Shares Small Cap

Upon U.S. federal legalization, Tilray to own 21% of the U.S. multistate operator

Business Strategy and Outlook

Tilray cultivates and sells cannabis in Canada and exports into the global medical market. It also sells CBD products in the U.S. The company is the result of legacy Aphria acquiring legacy Tilray in a reverse merger and renaming itself Tilray in 2021. Canada legalized recreational cannabis in October 2018. Since then, recreational sales have come to represent an increasingly larger portion of sales for producers. The Canadian market is overly crowded with producers, so Tilray faces stiff competition to develop consumer brands that can lead to meaningful pricing power. Buoyed by attractive deal terms, Tilray’s acquisition of HEXO’s senior secured convertible notes could potentially help drive necessary market consolidation.

Legacy Aphria had an extensive international distribution business, which generated the majority of its net revenue, a far larger portion than many of its Canadian cannabis peers. Legacy Tilray had also entered the global medical market. With both companies’ international capabilities intact, Tilray looks well positioned. The global market looks lucrative given higher realized prices and growing acceptance of the medical benefits of cannabis. Exporters must pass strict regulations to enter markets, which protects early entrants. It is foreseen, roughly 15% average annual growth through 2030 for the global medicinal market excluding Canada and the U.S.

In 2020, legacy Aphria acquired SweetWater, a U.S. craft brewery. Legacy Tilray previously acquired Manitoba Harvest to distribute CBD products in the U.S. It finally secured a toehold into U.S. THC when it acquired some of MedMen’s outstanding convertible notes. Upon U.S. federal legalization, Tilray would own 21% of the U.S. multistate operator. Furthermore, Tilray paid a great price while also getting downside protection as a debtholder. It is held, the U.S. offers the fastest growth of any market globally. However, the regulatory environment is murky with individual states legalizing cannabis while it remains illegal federally. It is alleged federal law will eventually be changed to allow states to choose the legality of cannabis within their borders

Financial Strength

At the end of its third fiscal quarter 2022, Tilray had about $710 million in total debt, excluding lease liabilities. This compares to market capitalization of about $4 billion.In addition, Tilray had about $279 million in cash, which will allow it to fund future operations and investments. Management has been deliberate with its SG&A spending given the slow rollouts and regulatory challenges the Canadian market has faced. Legacy Aphria was the first major Canadian producer to reach positive EBITDA, with legacy Tilray reaching positive EBITDA in the quarter immediately preceding its acquisition. However, the combined company continues to generate negative free cash flow to the firm, which pressures its financial health.The proposed deal to purchase $211 million in HEXO senior secured convertible notes is unlikely to add any pressure to Tilray’s financial health.With most of its development costs completed, it is anticipated Tilray will have moderate capital needs in the coming years. As such, it is held, debt/adjusted EBITDA to decline. It is alleged Tilray is unlikely to require significant raises of outside capital. In September 2021, the company received shareholder approval for increasing its authorized shares in order to rely on equity for future acquisitions. This bodes well for keeping its financial health strong.

Bulls Say’s

  • Legacy Aphria’s acquisition of Legacy Tilray created a giant with leading Canadian market share, expanded international capabilities, and U.S. CBD and beer operations.
  • Tilray’s management focuses on strategic SG&A spending and running a lean business model, benefiting its financial health in the early growth stage industry.
  • Tilray management’s careful approach to expansion has allowed it to reach profitability faster than any of its Canadian peers.

Company Profile

Tilray is a Canadian producer that cultivates and sells medical and recreational cannabis. In 2021, legacy Aphria acquired legacy Tilray in a reverse merger and renamed itself Tilray. The bulk of its sales are in Canada and in the international medical cannabis export market. U.S. exposure consists of CBD products through Manitoba Harvest and beer through SweetWater.

(Source: MorningStar)

General Advice Warning

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

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Dividend Stocks

Watsco to continue executing its buy and build strategy to outperform market growth

Business Strategy and Outlook

Watsco is the largest player in the fragmented heating, ventilation, air-conditioning, and refrigeration distribution industry with low-double-digit percentage market share. The company predominantly operates in the United States (approximately 90% of revenue) with an outsize presence in the Sunbelt states. Since entering the HVACR distribution market in 1989, Watsco has operated a “buy and build” strategy and has completed over 60 acquisitions that have expanded the company’s geographic footprint and product assortment. Watsco’s acquisition strategy has primarily targeted smaller family-owned businesses. The firm also operates three joint venture partnerships with narrow-moat-rated HVAC manufacturer Carrier. These JVs account for approximately 60% of consolidated revenue, and the relationship grants Watsco exclusive distribution rights for Carrier products across select regions of the U.S. 

According to the Air-Conditioning, Heating, and Refrigeration Institute, shipments of air-conditioners and furnaces in the U.S. have grown at about a 6% compound annual rate since the 2009 housing crisis trough. Over the same period, Watsco increased its top line at about a 10.5% CAGR, driven by about 5% average same-store sales growth and 5.5% average growth from acquisitions (including the formation of Carrier JVs). 

Residential HVAC demand (along with repair and remodel spending) soared during the pandemic, driven by more time spent at home and increased discretionary income. Strong pricing power for HVAC manufacturers and distributors accompanied the robust demand environment. Fiscal 2021 was an excellent year for Watsco with over 20% year-over-year revenue growth and record operating margin (10% compared with the 8% 10-year average). However, it is unlikely this performance is maintainable over the long run. Despite upcoming regulatory tailwinds, it is anticipated to see only modest HVAC shipment growth over the next 10 years (using 2021 as the base year) as the replacement cycle matures. Nevertheless, it is alleged Watsco will continue to execute its buy and build strategy to outperform market growth.

Financial Strength

Watsco has a perennially strong balance sheet as the firm has historically operated with very low financial leverage. While Watsco generates sufficient operating cash flow to reinvest in organic growth opportunities and acquisitions and return capital to shareholders, the firm does have an unsecured revolving credit facility that it uses to fund its capital allocation outlays. Nevertheless, Watsco’s net debt/EBITDA ratio averaged less than 0.5 during the last 10 years. It is held management will continue to operate with a conservative balance sheet for the foreseeable future.

Bulls Say’s

  • Watsco will continue to effectively employ its “buy and build” strategy to consolidate the HVAC distribution market and compound cash flow. 
  • Watsco serves end markets with attractive long-term growth prospects driven by an undersupplied U.S. housing stock, structurally higher R&R spending, and favorable regulatory changes (for example, energy efficiency standards). 
  • Watsco’s investments in digital technology have differentiated the firm from its competition.

Company Profile 

Watsco is the largest heating, ventilation, air-conditioning, and refrigeration products distributor in North America. The company primarily operates in the United States (90% of 2021 revenue) with significant exposure in the Sunbelt states. Watsco also has operations in Canada (6% of sales) and Latin America and the Caribbean (4% of sales). The company’s customer base consists of more than 120,000 dealers and contractors that serve the replacement and new construction HVACR markets for residential and light commercial applications. 

(Source: MorningStar)

General Advice Warning

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

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Dividend Stocks

More Questions Than Answers in Perpetual’s Offer for Pendal

Business Strategy and Outlook

Perpetual has three business offerings: as an asset manager, a private wealth advisor, and a corporate trust service provider. Acquisitions form part of the group’s strategy to build scale and expand its products and services.  Product, channel, and geographic diversification is a key focus for the investments business. It is executing this by mainly acquiring fund managers. This follows a history of subpar performance in its Australian investments business and its inability to grow organically. Recent acquisitions of Barrow Hanley and Trillium expand its addressable market and add to its asset class offerings. Priorities include growing its distribution offshore, expanding its clientele, and broadening its product suite. 

The private wealth business caters to the established wealthy, medical professionals, business owners, family offices, and aged care providers. It increases the value added to clients by providing a variety of services beyond financial planning. These capabilities are propped up by acquisitions. The Fordham acquisition is one example, where it allows Perpetual to extend accounting services to its clients. In return, its acquirers also act as referrers of new business.  The corporate trust business provides outsourced responsible entity, custodial, and trustee services to debt capital markets as well as to managed funds. Ongoing agendas include acquisitions to add scale–in the process allowing it to further lower its pricing–as well as the provision of value-added services such as data and analytic solutions to help increase the stickiness of its client base. 

The management’s initiatives are projected to revive growth in earnings and economic returns in the medium term. With increased investment, both Barrow Hanley and Trillium should offset outflows from Perpetual’s Australian equity funds and help grow fee revenue. The moatworthy private wealth and corporate trust businesses are also strong drivers of earnings growth: The former is positioned to gain market share in the domestic financial advice industry, while the latter benefits from growing securitisation volume and increasing demand for outsourced responsible entity services.

Financial Strength

Perpetual is currently in reasonable financial health with a modestly geared balance sheet. Perpetual has about AUD 248 million of debt as at Dec. 31, 2021. It has a gearing ratio (debt/[debt plus equity]) of 21.5% at the end of the period, below its stated target gearing of 30%. A gross debt/EBITDA ratio of 0.8 times is forecasted in fiscal 2022. Perpetual has stated it expects to reduce the gross debt/EBITDA to zero within five years following the acquisition of Barrow Hanley, which was completed in November 2020. Perpetual has revised its dividend payout ratio to 60%-90% of underlying profit after tax, in line with its focus on acquisitive growth. Although it is preferred that the firm maintains a balanced payout ratio, free cash flow is estimated to be sufficient to cover dividends even at a 90% payout ratio, in the absence of sizable acquisitions.

Bulls Say’s

  • New acquisitions, such as Trillium and Barrow Hanley, materially improve Perpetual’s growth prospects. There is potential for upside from increased reinvestment, which should help revive net inflows. 
  • The private wealth and trust segments benefit from tailwinds such as growth in the high-net-worth client space, as well as progressive increases in securitisation volume following the 2008 financial crisis. 
  • Large scale of FUMA and relatively low capital requirements provide recurring revenue streams and support strong returns on capital and positive free cash flows.

Company Profile 

Perpetual is one of Australia’s oldest financial services firms, founded in 1886. It has three operating segments, with the investments business being the main earnings generator. It mainly employs an active value style in managing listed assets. Perpetual also provides financial planning services to high-net-worth clients via its private segment. In its trust segment, it provides outsourced responsible entity services to funds, as well as custodial and trustee services in the debt capital markets, particularly in securitisation issuances.

(Source: MorningStar)

General Advice Warning

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

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Dividend Stocks

Self-help measures planned to optimize Kingfisher’s store footprint

Business Strategy and Outlook

Kingfisher is a leading home improvement retailer operating under the retail banners of B&Q and Screwfix in the U.K and Brico Depot and Castorama in France, while also expanding in other European markets. Kingfisher has attempted multiple strategies to optimize its product offering and leverage its leading position in the French and British home improvement market with little success delivering excess economic returns. While the coronavirus pandemic has provided unexpected tailwinds for Kingfisher, such as increases in do-it-yourself activity and online penetration rates, operating margins remain below U.S peers, who enjoy greater scale and are thus able to operate at a more efficient cost base. 

Prior to the pandemic, Kingfisher had not reported an increase in like-for-like sales since fiscal 2017. The COVID-19-driven home improvement trend is unlikely to be maintainable as customers shift expenditures toward services as governments no longer impose lockdown restrictions and rising interest rates lowers accessibility to homeownership, a major driver of home improvement activity. 

With consumer demand currently elevated, greater emphasis is placed on Kingfisher’s ability to grow market share through investments into its digital capabilities and own-exclusive brands, especially from trade customers who visit stores more frequently and have a larger basket size. Kingfisher’s retail banners in France are dilutive to the group and will benefit from the reorganization of its logistics operation in the region, which will reduce transportation costs and improve customer service. Self-help measures such as optimizing Kingfisher’s store footprint, lease renegotiations at lower rates and reversing stock inefficiencies will free up cash that will be returned to shareholders via a dividend payout ratio of approximately 40%.

Financial Strength

Kingfisher is in a sound financial position. The group ended fiscal 2022 with a net debt/EBITDA ratio (including lease liabilities) of 1.0 times, below its 2.0-2.5 target range, which provides a cushion for any potential slowdown in DIY activity in the future. The group is also one of the few around with a pension surplus.Kingfisher has very little funded debt, which is comfortably covered by the group’s cash balance. Kingfisher’s main source of debt are lease liabilities, consisting of GBP 2.4 billion within its net debt position of GBP 1.6 billion as at fiscal 2021-22. Approximately 40% of Kingfisher’s store space is owned (mostly in France and Poland), which provides financial flexibility, as these assets can be monetized through sale and leaseback transactions, a tool Kingfisher has begun to use. Better inventory management, which lags peers, would also improve Kingfisher’s cash generation.

Bulls Say’s

  • Demand for Kingfisher’s home improvement products stands to benefit from aging housing stock in the U. K. and France, as well as people spending more time indoors during the pandemic. 
  • Self-help opportunities at Kingfisher should help increase operating margins by optimizing its store space footprint and improving logistical inefficiencies across its French operations. 
  • As the second-largest home improvement retailer in Europe, Kingfisher has the opportunity to better leverage its size to drive costs down and use its customer knowledge to develop its own products.

Company Profile 

Kingfisher is a home improvement company with over 1,470 stores in eight countries across Europe. The company operates several retail banners that are focused on trade customers and general do-it-yourself needs. Kingfisher’s main retail brands include B&Q, Screwfix, and TradePoint in the United Kingdom and Castorama and Brico Depot in France. The U.K. and France are Kingfisher’s largest markets, accounting for 81% of sales. The company is the second-largest DIY retailer in Europe, with a leading position in the U.K. and a number-two position in France. 

(Source: MorningStar)

General Advice Warning

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