Tag: Recommendations

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Dividend Stocks

Another Solid Medibank Result Despite Ongoing Noise Around Claim Costs

Business Strategy and Outlook

Medibank is Australia’s largest private health insurer operating under the Medibank and ahm brands. The dual brand strategy has successfully allowed the group to offer differentiated pricing and messaging to grow members and profits. Despite the “free” universal public system in Australia, around 45% of Australia’s population have private hospital cover due to taxation benefits and penalties, shorter wait times, and a choice of doctor and hospital. We expect government policy settings, which promote the take up and retention of private health insurance products, to remain in place. With an ageing population, higher demand for more intense healthcare will further pressure the public health system.

Despite larger players generating respectable return on equity on mid-single-digit profit margins, smaller providers have less capacity to absorb the expected claims inflation. This could eventually lead to industry consolidation, or at the least a pull-back in marketing expenses and policyholder acquisition costs. Medibank’s Other Health Services division provides in-home healthcare services such as nursing, rehabilitation, and health coaching for corporates. Medibank health also includes the sales of travel, life, and pet insurance, where Medibank is not the underwriter but is paid a commission.

Financial Strength

Medibank’s first-half fiscal 2022 profit slipped 2.7% to AUD 220 million but was in line with our broadly unchanged earnings forecasts. In a debt-free position Medibank is in sound financial health. It is forecasted that Medibank can fund for long-term organic growth from cash flows, while maintaining the current 75% to 85% target dividend payout range. As at Dec. 31, 2021, Medibank held AUD 1.95 billion in capital, equating to 13% of annual premiums, the top end of the firm’s 11%-13% target range. Given low claims volatility in health insurance the insurer could carry some debt, but given a large acquisition is not expected, we believe the conservative balance sheet is likely to remain a feature of Medibank. Investment assets of AUD 2.8 billion were allocated 18% to cash, 61% to fixed income, and 21% to equities, property and other assets as at Dec. 31, 2021.

Bulls Say’s

  • Industry growth is tied to a steadily increasing population, ageing demographics and the rise in healthcare spending. Governments will continue to incentivise participation in private health insurance to share the burden of escalating healthcare costs. 
  • Premium growth is generally tied to the increasing cost of healthcare. 
  • The symbiotic relationship with the private hospital operators and buyer power over general practitioners is a key strength of Medibank’s business model. The majority of private hospital income is paid by the insurers.

Company Profile 

Previously owned by the Australian government, Medibank is the largest health insurer in Australia. Its two brands, Medibank Private and ahm, cover over 4.8 million people. Medibank and Australia’s fourth-largest health fund NIB Holdings are the only listed health insurers. In addition to private health insurance, the firm provides life, pet, and travel insurance, as well as health insurance for overseas students and temporary overseas workers. The Medibank Health division provides healthcare services to businesses, governments, and communities across Australia and New Zealand.

(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.

Categories
Technology Stocks

WiseTech Global Ltd reported strong 1H22 results driven by strong top line revenue growth

Investment Thesis

  • Market leading position (significantly ahead of the nearest competitor).
  • Growing global trade and increasingly globalization of products sold.
  • High degree of revenue visibility and low customer annual attrition rates. 
  • R&D spend will ensure product/services are enhancing WTC products. WTC’s vision is to be the operating system for global logistics. Having completed 39 acquisitions since its IPO in 2016, WTC has assembled significant resources and development capabilities to fuel its CargoWise technology pipeline.
  • Scalability of the business model.  
  • Geopolitical tensions considered by management as “tailwinds” due to higher consolidation of the logistics software industry.

Key Risks

  • Company announces another earnings downgrade.
  • Organic growth could moderate further, which may no longer warrant such a lofty valuation. However, organic growth has improved over FY19.
  • Management noting that revenues from recent acquisitions actually declined and offered little margin. This means the return from these acquisitions could take longer than management’s expectations. 
  • Competitive threat (new product/technological advancements).
  • Disruption to technology (data breach).
  • Adverse currency movements.

1H22 Results: Relative to the pcp:

  • 1H22 Total Revenue of $281.0m, up +18% (+22% ex FX) on 1H21. 
  • CargoWise revenue was up +29% (+33% ex FX) to $193.0m, driven by Large Global Freight Forwarder rollouts, new customer wins, price and increased existing customer usage. 
  •  Acquisition (non-CargoWise) revenue of $87.9m, down -1% (up +2% ex FX). 
  •  Market penetration momentum continuing – two new global rollouts secured in 1H22 – FedEx and Access World – and Brink’s Global Services (Brink’s) signed post 31 December 2021. 
  •  Ongoing product development delivered 589 CargoWise new product features and enhancements and continued expansion of the CargoWise ecosystem. 
  •  Organization-wide efficiency and acquisition synergy program well-progressed – $20.2m of gross cost reductions in 1H22 (net benefit $19.7m). 
  •  EBITDA of $137.7m up +54% driven by revenue growth and cost reductions. Margin of 49%, up 12bps. CargoWise’s 1H22 EBITDA margin of 58% represents an increase of 4pp on 1H21. 
  •  Underlying NPAT of $77.3m, up +77%. 
  •  WTC generated strong free cash flow of $90.3m, up +85%. 
  •  WTC retained a strong balance sheet, with cash as at 31 December 2021 of $380.3m and no outstanding debt excluding lease liabilities. WTC has an undrawn, unsecured, four-year, $225m, bi-lateral debt facility, to fund future growth. 
  •  WTC’s Board declared a fully franked interim ordinary dividend of 4.75cps, which equates to payout ratio of 20% of Underlying NPAT.

Company Profile

WiseTech Global (WTC), founded in October 1994, is a leading provider of software to the logistics services industry globally. WTC develops, sells and implement software solutions that enable logistics service providers to facilitate the movement and storage of goods, domestically and internationally. WTC’s software assists their customers to better address and adapt to the complexities of the logistics industry while increasing their productivity, reducing costs and mitigating risks. WTC services over 6,000 customers across more than 115 countries with offices in Australia, New Zealand, China, Singapore, South Africa, United Kingdom and the United States. 

(Source: Banyantree)

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.

Categories
Technology Stocks

VMware’s VSphere and ESXi Hypervisor Being Virtualization Gold Standards

Graphic of investment stock market data analysis business

Business Strategy and Outlook

VMware, a pioneer of virtual machines, dominates the maturing data center server virtualization market. With organizations prioritizing cloud over on-premises computing infrastructure, it is seen VMware’s robust cloud provider partnerships, including the hyperscalers, should help the firm handle the changing market landscape. It is anticipated VMware’s growth to come from being the glue between computing infrastructures, networking locations, and burgeoning security and developer offerings being bolstered from its strong end user compute portfolio. 

Analysts’ view of cloud networking, akin to VMware’s assessment, is that most enterprises will utilize hybrid cloud solutions. Public clouds can precipitously augment network growth but enterprises face integration complexities among on-premises networks and private and public clouds. Beyond hyperscale cloud provider partnerships, VMware’s Cloud Provider Program offers thousands of cloud partners collaborating with VMware software. In Analysts’ view, this allows VMware to remain ingrained in networks while becoming the commonality between private and public clouds. It is held the November 2021 spin-off from Dell Technologies put an end to an uncertain future around VMware, and that growth can accelerate through VMware’s integration with cloud vendors and cadence of product releases outside of Dell’s umbrella. With solid free cash flow and growth opportunities, it is foreseen its $11.5 billion special dividend, to all shareholders, as part of the spin-off was worth the price of becoming a stand-alone entity. 

VMware’s vSphere and ESXi hypervisor are virtualization gold standards, and its hybrid cloud platform creates a consolidated view across multicloud environments. It is projected the company’s strong franchises within end user compute, security, and virtualized networking and storage can be overlooked, and support growth ventures such as VMware’s integration of Kubernetes-based container management within vSphere. It is likely, software cohesion across on-premises and clouds along with nascent networking products should give VMware sustainable growth.

Financial Strength

It is held VMware a financially stable company that should continue generating strong free cash flow. The company’s main expenditures are in the forms of developing product innovations and marketing efforts. VMware’s R&D expenditures are in the low 20s as a percentage of revenue while sales and marketing expenditures are in the low 30s. In the past, VMware has bolted on firms to bolster its presence in focus growth areas, and it is projected organic developments to be supplemented with future acquisitions. As of the end of fiscal 2022, VMware had $3.6 billion in cash and equivalents, and it is anticipated the company will pay its debts on time.VMware completed its first special dividend of $11 billion in December 2018, which helped Dell Technologies facilitate an exchange of Dell Class V tracking stock (DVMT) for a new class of Dell Technologies Class C common stock or a cash buyout option for shareholders. As part of becoming an independent company and spinning off from Dell, VMware paid special dividends worth $11.5 billion and retained an investment-grade credit rating. Although VMware raised capital to help pay the special dividend, it is likely to quickly lower its obligations through cash on hand and its robust free cash flow generation.

Bulls Say’s

  • VMware’s hybrid cloud program could yield tremendous growth if VMware is cemented as the dominant software supplier between private and public clouds. Its presence in hyperscale public cloud networks could make it the de facto virtualization choice. 
  • Product leadership in application management, enduser computing, cybersecurity, and software-defined networking provides robust growth opportunities beyond core virtualization. 
  • VMware can more tightly integrate itself with Dell peers as a stand-alone company, while also benefiting from its Dell commercial contract and their salesforce.

Company Profile 

VMware is an industry leader in virtualizing IT infrastructure and became a stand-alone entity after spinning off from Dell Technologies in November 2021. The software provider operates in the three segments: licenses; subscriptions and software as a service; and services. VMware’s solutions are used across IT infrastructure, application development, and cybersecurity teams, and the company takes a neutral approach to being the cohesion between cloud environments. The Palo Alto, California, firm operates and sells on a global scale, with about half its revenue from the United States, through direct sales, distributors, and partnerships. 

(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.

Categories
Dividend Stocks

Orora Ltd strong momentum with ongoing share buyback and balance sheet flexibility

Investment Thesis

  • Trading on fair value relative to our valuation.
  • Exposure to both developed and emerging markets’ growth.
  • Near-term headwinds should be in the price.
  • Revised strategy following recent strategic review.
  • Bolt-on acquisitions (and associated synergies) provide opportunities to
  • supplement organic growth.
  • Leveraged to a falling AUD/USD.
  • Potential corporate activity.
  • Capital management (current on-market share buyback plus potential for
  • additional initiatives).

Key Risks

  • Competitive pressures leading to margin erosion.
  • Input cost pressures which the company is unable to pass on to customers.
  • Deterioration in economic conditions in US, EM and Australia.
  • Emerging markets risk.
  • Adverse movements in AUD/USD.
  • Declining OCC prices.

1H22 Results Highlights

  • Sales revenue increased +9.6% (+10.6% in CC).
  • Underlying EBIT increased +10.4% (+11.1% in CC) driven by significantly improved performance in the North America segment.
  • Operating cash flow increased +0.6% to $145.5m with cash conversion declining -400bps to 75%, with higher earnings offset by an increase in working capital.
  • Net debt increased +13% over 2H21 to ~$512m, primarily reflecting the impact of increased debt arising from the on-market share buyback and increased capex partially offset by stronger earnings. ORA’s current leverage of 1.6x is below management’s targeted level of 2-2.5x EBITDA.

Company Profile 

Orora Limited (ORA) provides packaging products and services. The Company offers fiber, glass and beverage can packaging materials in Australia and Asia and packaging distribution services in North America and Australia.

(Source: BanyanTree)

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.

Categories
Shares Small Cap

Temple & Webster Group strong focus on reinvesting earnings back into business

Shot of elegant smart businesswoman explaining a project to his colleagues with statistics on the computer on coworking place.

Investment Thesis

  • Operates in a large addressable market – B2C furniture and homewares category is approx. $16bn. 
  • Structural tailwinds – ongoing migration to online in Australia in the homewares and furniture segment. At the moment less than 10% of TPW’s core market is sold online versus the U.S. market where the penetration rate is around 25%.  
  • Strong revenue growth suggests TPW can continue to win market share and become the leader in its core markets. 
  • Active customer growth remains strong, with revenue per customer also increasing at a solid rate. 
  • Successful execution in new growth pillars – Trade & Commercial (B2B) and Home Improvement. 
  • Management is very focused on reinvesting in the business to grow top line growth and capture as much market share as possible. Whilst this comes at the expense of margins in the short term, the scale benefits mean rapid margin expansion could be easily achieved. 
  • Strong balance sheet to take advantage of any in-organic (M&A) growth opportunities, however management is likely to be very disciplined. 
  • Ongoing focus on using technology to improve the customer experience – TPW has invested in merging the online with the offline experience through augmented reality (AR). 

Key Risks

  • Rising competitive pressures.
  • Any issues with the supply chain, especially because of the impact of Covid-19 on logistics, which affects earnings / expenses. 
  • Rising cost pressures eroding margins (e.g., more brand or marketing investment required due to competitive pressures).
  • Disappointing earnings updates or failing to achieve growth rates expected by the market could see the stock price significantly re-rate lower. 
  • Trading on high PE-multiples / valuations means the Company is more prone to share price volatility. 

1H22 Result Highlights

  • TPW delivered strong top line growth of +46% YoY for 1H22, despite experiencing some supply chain and product availability issues (which also impacted customer satisfaction metrics). Hence the growth rate would have likely been stronger in our view. The Company also saw some inflationary pressures on product and freight, which saw 1H22 delivered margin decline to 30.5% (from 33.0% in pcp) and was in line with management’s previous guidance.
  • Advertising & Marketing costs were up +55% YoY and increased as a percentage of revenue to 13.6% (from 12.8% in pcp), driven by a step up in both performance and brand marketing. TPW’s brand awareness continues to increase, now above 60%. Management also spoke about pushing the brand awareness strategy nationally.
  • TPW’s ongoing investment in the business (people and technology, new growth horizons in B2B and home improvement) saw fixed cost increase YoY and hence saw EBITDA decline -19% YoY to $12.0m.
  • TPW posted the sixth straight quarter of revenue per active customer growth, which was up +10% YoY. This was driven by higher average order value and the repeat rate. 

Company Profile 

Temple & Webster Group (TPW) is a leading online retailer in Australia, which offers consumers access to furniture, homewares, home décor, arts, gifts, and lifestyle products. 

(Source: BanayanTree)

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.

Categories
Fixed Income Fixed Income

TIAA-CREF Core Plus Bond Fund Premier Class

They need an advice. Young married couple talking while sitting on the therapy session with psychologist

TIAA-CREF Core Plus Bond has an experienced lead manager and the solid process remains intact, while the expansive supporting cast has only broadened. Veteran manager Joe Higgins, who has led the sibling strategy TIAA-CREF Core Bond TIBDX since 2011, took over this strategy at the end of 2020 when longtime lead manager Bill Martin retired.

Approach

Lead manager Joe Higgins continues the thoughtful relative value approach that has been in place both here and on his other charge, TIAA-CREF Core Bond TIBDX. This strategy earns an Above Average Process Pillar rating. Higgins has the ultimate authority in ensuring what holdings go into the portfolio but draws heavily on the strength and expertise offered by the sector managers, analysts, and macroeconomic strategists in identifying relative value opportunities across the fixed-income universe. The strategy can invest in everything from corporate bonds and mortgages to municipal bonds and emerging-markets debt, with the higher-risk sectors like high-yield bonds, bank loans, and emerging-markets debt ranging between 10% and 30% depending on the team’s outlook and risk appetite.

Portfolio

As of December 2021, the portfolio’s largest exposures were to investment-grade corporate bonds (24.2% of assets), agency mortgage-backed securities (18.6%), and emerging-markets debt (10.2%). The emerging markets exposure rarely if ever broke double-digit threshold, but its allocation has been on the upswing since March 2020 given the portfolio managers’ belief in its ability to outperform over the long term. The emerging markets’ relative lack of direct correlation to domestic corporate moves, as well as premium on offer from new issuance, make them attractive. 

People

Joe Higgins, who replaced longtime lead manager Bill Martin at the end of 2020, is a seasoned and capable manager supported by three experienced comanagers and a robust analyst team. The strategy earns an Above Average People Pillar rating.

Performance

The strategy under Joe Higgins’ tenure has bested almost 70% of distinct peers in the intermediate core-plus bond category, keeping up with the record his predecessor Bill Martin set during his tenure from September 2011 to December 2020. Over that period, the Institutional share class returned 4.5% annualized and outpaced roughly two thirds of peers. While lagging performance punctuated this record at various points, most notably in March 2020, by and large “measured consistency” was the characteristic on display for this strategy’s performance.

(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.

Categories
Funds Funds

Vanguard LifeStrategy Conservative Growth Fund Investor Shares: Broadly Diversified, Low-Cost, And Effective

Approach

Vanguard’s efficient, low-cost method provides series’ investors with broad market exposure. The sensible and well-executed approach earns a renewed Above Average Process rating. The equity exposure of the four funds in the lineup (Vanguard LifeStrategy Income VASIX, Vanguard LifeStrategy Conservative Growth VSCGX, Vanguard LifeStrategy Moderate Growth VSMGX, and Vanguard LifeStrategy Growth VASGX) is 20%, 40%, 60%, and 80%, respectively. Vanguard’s strategic asset allocation committee and the investment strategy group provide oversight for the fund series. On an annual basis, the committee reviews the allocations, leveraging research produced by the investment strategy group. The committee takes a cautious tack, which results in a relatively modest approach to implementation changes. Prior to 2011, the series included an allocation to a tactical asset allocation strategy, but that piece was removed, resulting in an exclusively passive underlying fund lineup and strictly strategic procedure. International bond exposure was introduced to the series in 2013, and in 2015 international exposure was increased within both the equity and the fixed-income sleeves: non-U.S. stock exposure increased to 40% from 30% and non-U.S. bond exposure increased to 30% from 20%. The firm’s research suggests that a market-cap weighted approach delivers broad exposure and effectively diversifies the funds but cites investors’ home-country preferences.

Portfolio

As of early 2022, the strategies comprising each portfolio receive compelling ratings. The series’ equity sleeves hold Silver-rated Vanguard Total Stock Market Index VTSMX and Gold-rated Vanguard Total International Stock Index VGTSX. On the fixed-income side, the funds tap Vanguard Total Bond Market II Index VTBIX and Vanguard Total International Bond Index VTIBX, both rated Bronze. The latest addition, Vanguard Total International Bond Index II VTIIX, was launched in February 2021 as a clone of Vanguard Total International Bond Index. The fund is exclusively used in the LifeStrategy and the target retirement series, allowing Vanguard to separate transaction costs generated by the massive target retirement series and LifeStrategy from those generated by other investors. Managers began transitioning the international bond exposure to the clone fund in March 2021 and will continue to do so in a tax-sensitive manner. In the wake of a volatile early 2020, the firm updated the threshold rebalancing policy for multi-asset strategies. Prior to 2021, the rebalancing policy stipulated allocation guardrails of 75 basis points; if exceeded, managers rebalanced the allocations to within 50 basis points of the benchmark. As of Jan. 1, 2021, the new guardrails sat at 200 basis points; if exceeded, managers rebalanced the portfolios to within 100 basis points of the target allocations. This change is reasonable and should reduce the strategy’s rebalancing frequency as intended. 

People

Experienced leadership, a multigroup approach, and robust teams across Vanguard merit a renewed Above Average People rating. The LifeStrategy series is managed by the same teams that oversee the firm’s target retirement funds. Vanguard’s strategic asset allocation committee is responsible for ongoing oversight of multi-asset funds. The committee’s 10 voting members include senior leaders across the firm, such as its global chief economist, who also serves as the committee chair. The strategic asset allocation committee is supported by the firm’s investment strategy group, which is composed of a global network of more than 70 investment professionals. Their research covers an array of topics ranging from investor behavior to portfolio construction. Management of the underlying index funds remains stable and well-resourced. Gerard O’Reilly and Walter Nejman manage the U.S. equity index fund, while Michael Perre and Christine D. Franquin cover the international counterpart. O’Reilly and Perre each have roughly three decades of tenure at Vanguard. Franquin and Nejman have spent 21 and 16 years at Vanguard, respectively. Fixed-income manager Joshua Barrickman joined the firm in 1998 and assumed the role of head of fixed-income indexing in the Americas in 2013. Barrickman manages both the domestic and international bond strategies.

Performance 

Over the trailing 10 years ended January 2022, three of the four funds outperformed their target risk Morningstar Category benchmarks and their allocation fund category peer medians in total annualized returns, respectively. The Moderate Growth fund was the exception: it managed to outpace its Morningstar Moderate Target Risk Index category benchmark but underperformed the typical peer in the competitive allocation — 50% to 70% equity category. On a risk-adjusted basis (as measured by Sharpe ratio) over the same period, all four portfolios outperformed their category benchmarks and their average peer constituent. Notably, the two most conservative funds of the series both landed in the best performing deciles of their respective category peer groups while the most risk-tolerant fund landed in the best performing quintile of the allocation — 70% to 85% equity category group. 

The series’ bond sleeves have a higher duration profile relative to peers, which results in greater sensitivity to changes in interest rates. The recent low-yield environment and threat of rising rates presented a challenge to the profiles here, and for the one-year return ended January 2022, all four portfolios underperformed their respective category peer averages and three of the four underperformed their respective category benchmarks. Only the Growth fund outpaced its Morningstar Moderate Aggressive Target Risk Index category benchmark in that period.

About Fund:

The Vanguard Group earns a High Parent rating for its investor-centric ethos, reliable strategies, and democratization of advice. Vanguard is the asset-management industry’s only client-owned firm, and it shows. Vanguard uses the money that its passive strategies make from securities lending to lower if not eliminate headline expense ratios. Modest fees, capable subadvisors, and performance incentives spur its active business to competitive results. Vanguard also offers advice, human and digital, at an accessible cost. All of this helped its global assets under management grow to USD 7.5 trillion as of March 31, 2021. Yet, Vanguard’s non-U.S. business only accounts for a fraction of its assets. Incumbents within many of these markets have sought to keep this low-cost provider at bay. Vanguard has shifted from leading with exchange-traded funds to using advice for entry, such as its joint venture with China’s Ant Financial to offer a mobile-based retail service, which had more than 1 million Chinese users a year after its April 2020 launch. 

(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.

Categories
Technology Stocks

GOOGL’s 4Q21 results highlighted the strength in Google’s Search business

85215903 - attractive businessman using mobile phone while having lunch

Investment Thesis:

  • Commands a strong market position in online advertising and online eyeballs. 
  • Search advertising increases its share of advertising spend. 
  • Leveraged to online video streaming and advertising via YouTube. 
  • Strong balance sheet with over US$130bn in cash, which gives flexibility to invest in growth options or undertake capital management initiatives. 
  • Focus on innovation across advertising businesses, which should help to sustain growth.
  • Strong management team.
  • Value accretive acquisitions in existing and new growth areas. 
  • Recent disclosure suggests GOOGLE’s Cloud business building good revenue momentum. 

Key Risks

  • Threat of increased regulatory scrutiny, including concerns around consumer privacy and personal data. 
  • Regulatory changes which impact the way GOOGLE does business (e.g. forced changes to products). 
  • Expenses such asTAC (traffic acquisition costs) increase ahead of expectations and which the company is unable to pass onto customers.
  • Deterioration in economic conditions, which would put pressure on the advertising revenue.
  • Competition from companies like Facebook Inc., Amazon etc. could put pressure on margins. 
  • Potential return from investment on new, innovative technology fails to yield adequate results

Key Highlights: 4Q22 group results. 

Relative to the previous corresponding period (pcp), group revenues of $75.3bn was up +32% (or up +33% in constant currency). Group cost of revenues of $32.9bn was up +26%, mostly driven by other cost of revenues (up +25% to $19.6bn). The drivers of this were: content acquisition costs (primarily driven by costs for YouTube’s advertising-supported content); costs for subscription content; hardware costs; and costs associated with data centers and other operations. Operating income of $21.9bn was up +40%, with operating margin at 29%. Net income of $20.6bn was up +36%. GOOGLE maintains an attractive free cash flow profile, delivering FCF of $18.6bn in 4Q21 and $67bn in FY21. The Company ended FY21 with $140bn in cash and marketable securities and repurchased a total of $50bn shares in FY21.

Google Services is driven by strong consumers: Overall Google Services revenue for FY21 of $237.5bn was up +41% YoY, a significant acceleration on FY20A growth of +11%. 4Q21 revenue of $69.4bn was up +31% YoY, “driven by broad-based strength in advertiser spend and strong consumer online activity.” Over 4Q21, “retail was again by far the largest contributor to year-on-year growth of our ads business. Finance, media and entertainment, and travel, were also strong contributors.”

Company Profile

Alphabet Inc is headquartered in Mountain View, California, and provides online advertising services across the globe. It offers performance and brand advertising services through Google and Other Bets segments. The Google segment offers products, such as Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, Hardware, Search, and YouTube, as well as technical infrastructure. This segment also offers digital content, cloud services, hardware devices, and other miscellaneous products and services. The Other Bets segment includes businesses, including Alphabet Inc is headquartered in Mountain View, California, and provides online advertising services across the globe. It offers performance and brand advertising services through Google and Other Bets segments. The Google segment offers products, such as Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, Hardware, Search, and YouTube, as well as technical infrastructure. This segment also offers digital content, cloud services, hardware devices, and other miscellaneous products and services. The Other Bets segment includes businesses, including Access, Calico, CapitalG, GV, Verily, Waymo, and X, as well as Internet and television services.

(Source: Banyantree)

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.

Categories
Dividend Stocks

Calendar 2021 Guidance Met and Cash Can Now Begin to Flow Again for Cimic

Business Strategy and 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.

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.

Financial Strength

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. 

Bulls Say’s

  • Cimic could remain under pressure due to slower demand for mining services. Mining construction often involves higher levels of risk, as a result of fixed-price, fixed-time, and long-duration contracts. 
  • Cimic’s CEO was confidently forecasting strong earnings before COVID-19 led to an about-face and withdrawal of guidance. But Cimic says it is now building positive cash flow momentum again with awarding of new work. 
  • Increased focus on infrastructure construction projects and maintenance has helped stabilise earnings during weak market conditions for the domestic mining and energy sectors.

Company Profile 

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 76% of Cimic.

(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.

Categories
Technology Stocks

Confident in Zebra’s Long-Term Fundamentals After Supply Constraints Abate; FVE Up to $449

Business Strategy and Outlook

Zebra Technologies is a key partner for supply chain, logistics, and operational efficiency for customers across industry verticals. Zebra has acquired and maintained a dominant share position in the automatic identification and data capture, or AIDC, marketby pivoting into higher-growth technologies over its life.

Morningstar analysts agree with the firm’s ongoing pivot into software, developing platforms internally and through acquisitions to augment and complement its existing portfolio.  Layering prescriptive software with machine learning and artificial intelligence on top of these solutions allows customers to focus on activities with higher return on investment and creates a stickier solution by further embedding Zebra’s technology in customer processes. Morningstar analysts think Zebra’s custom solutions give rise to steep customer switching costs, which underpin our narrow economic moat rating.

 Morningstar analysts expect Zebra to benefit from ongoing secular trends toward digitization and automation, notably in omnichannel retail, which has been accelerated by the COVID-19 pandemic and is a tailwind for the firm. Analysts consider the firm’s highest-growth opportunities will come from further building out its software portfolio and growing its base of recurring revenue, as well as from expanding its footprint in the healthcare market as health records and hospital workflows become digitized. The firm is done paying down its debt from its transformative 2014 Motorola deal, and management is now committing capital to bolt-on M&A and its heady research and development budget.

Confident in Zebra’s Long-Term Fundamentals After Supply Constraints Abate; FVE Up to $449

Morningstar analysts raise its fair value estimate for Zebra Technologies to $449 per share, from $430, after the firm reported solid fourth-quarter results and raised its long-term guidance. Morningstar analysts believe COVID-19 impacts have benefited Zebra’s growth through accelerating demand for digitized solutions and automated workflows, however, it has simultaneously resulted in cost headwinds for supply chain and logistics, pressuring margins. Morningstar analysts believe that the long-term outlook for Zebra to lead the market in end-to-end digital transformation solutions and durably grow margins will come to fruition, despite ongoing constraints and considered it as short term. Morningstar analysts have greater confidence in Zebra’s growing portfolio of high growth adjacent markets to bolster the top line and modestly raise its long-term growth expectations. Shares pulled back on weak short-term margin guidance, and Morningstar analysts now view them as fairly valued.

Financial Strength

The firm was highly leveraged following its 2014 acquisition of Motorola Solutions’ enterprise division, but in the years following it has steadily paid down its debt. As of Dec. 31, 2021, the firm carried $991 million in debt, making its ratio of net debt/trailing 12-month adjusted EBITDA 0.51 times, well below the top of its target range of 2.5 times. Morningstar analysts  forecast Zebra to generate an average of $1.4 billion in free cash flow each year through 2026 and  allow it to easily service its obligations. With the remainder, analysts  expect the firm to pursue additional bolt-on acquisitions and conduct opportunistic share repurchases. However, Morningstar analysts don’t anticipate a transformative deal (like Motorola) in the short term and anticipate Zebra to remain in its target debt/EBITDA range. Zebra engages in receivables factoring, mostly in its operations in Europe, to help fund working capital. If the firm were to encounter a cash crunch, it has over $800 million of its revolving credit facility, which doesn’t expire until 2024, currently untapped.

Bulls Say 

  • Zebra derives 80% of its sales from a robust ecosystem of channel partners, which can customize its technology to specific sub verticals. 
  • Zebra has the largest share of the AIDC market with over 40%, per VDC Research. 
  • Zebra’s pivot into software should enable it to pursue higher-growth opportunities, expand margins, and heighten switching costs at end customers.

Company Profile

Zebra Technologies is a leading provider of automatic identification and data capture technology to enterprises. Its solutions include barcode printers and scanners, mobile computers, and workflow optimization software. The firm primarily serves the retail, transportation logistics, manufacturing, and healthcare markets, designing custom solutions to improve efficiency at its customers

(Source: Morningstar)

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