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Technology Stocks

Shaw and Roger’s Merger is Expected to Close in 2022, But Regulatory Approval is Not Certain

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Shaw has made significant efforts to improve its wireless network and is now bundling wireless with wireline service to customers in its cable footprint, enabling it offer even better value and enhancing service when offloaded onto its Wi-Fi network. Between the ends of fiscal years 2016 and 2020, Shaw more than doubled its postpaid wireless subscriber base, increased average billings per user (ABPU) by 20%, and expanded its wireless EBITDA margin by 900 basis points. The firm continues to invest heavily to improve its wireless network, and we think the firm is a legitimate competitor for new wireless customers and will continue seeing wireless results trend upwards.

Shaw ended fiscal 2020 with 5.3 million wireline revenue generating units, or RGUs, down from 6.4 million RGUs in 2012. The losses are attributable to television and voice customers, which face secular challenges for all competitors, but even Internet customer growth has been anemic (up 2% since 2017, including customer losses in 2020). Shaw has materially underperformed Telus across all types of RGUs. Telus has grown its Internet customer base by 22% since 2017 while also adding television customers. Its RGU base has grown from to 4.5 million from 3.8 million in 2012.

Shaw’s total revenue was up 5% year over year, though growth would’ve been only 3% excluding a benefit from a recent regulatory decision. The firm’s EBITDA margin was up 30 basis points year over year but was significantly better. Average billings per user, or ABPU, was down to CAD 40.56 from CAD 44.27 in the year-ago period. We’ve expected significant ABPU compression as the firm pushes Shaw Mobile, where Shaw’s wireline customers can add wireless service for extraordinarily low prices, but the 8.5% drop was more than we anticipated, especially given that net additions were muted. The firm added fewer than 47,000 postpaid wireless subscribers.

Financial Strength

Shaw is currently in a good financial position, which we think is critical, as it will need the flexibility in the coming years. At the end of fiscal 2020, Shaw had over CAD 700 million in cash and CAD 4.5 billion in long-term debt, which represented 1.6 times net debt to adjusted EBITDA—below its target ratio of 2.0-2.5 and well below those of Shaw’s big competitors in its industry. Shaw’s coverage ratio (adjusted EBITDA to interest expense) ended 2020 at 8.7, and the company has CAD 1.5 billion available on a revolving credit facility. Shaw has no long-term debt maturing until the end of 2023.

Wireless competition

  • Shaw is doing all the right things to build up its wireless business, acquiring and building out sufficient assets and luring customers by offering great deals.
  • The Canadian government is keen on bringing wireless competition to the big three incumbents. Unlike previous national upstarts, Shaw’s strong financial position and family control afford it the time and money to stick with a long-term strategy to succeed.
  • Shaw’s move to bundle wireless and wireline service with Shaw Mobile could expedite its wireless share gains and stem wireline losses it has seen recently.

Company Profile

Shaw Communications is a Canadian cable company that is one of the biggest providers of Internet, television, and landline telephone services in British Columbia, Alberta, Saskatchewan, Manitoba, and northern Ontario. In fiscal 2020, more than 75% of Shaw’s total revenue resulted from this wireline business. Shaw is also now a national wireless service provider after acquiring Wind Mobile in 2016. Shaw has upgraded its wireless network, undertaken an aggressive pricing strategy, and significantly enhanced its spectrum holdings. As a smaller carrier, Shaw has favored bidding status in spectrum auctions, giving it a further boost in enhancing its wireless network. At the 2019 auction, Shaw added significant amounts of 600 MHz spectrum to the 700 MHz spectrum it is currently deploying.

(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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Technology Stocks

A Lead Supplier – Cerner in Healthcare IT Solutions & Technology Enabled Services

While the market for acute care EHR is mature and offers little growth, the firm has been able to expand into other areas, such as ambulatory (outpatient) care and secure clients in the federal space, notably with the Department of Defense (DOD) and Department of Veterans Affairs (VA). Combined, these contracts offer $20 billion in revenue to be recognized ratably per site implementation by 2028. Additionally, Cerner has started to cross-sell incremental analytics services to fortify retention rates. Incremental services are largely recurring in nature and include analytics, tele health, and IT outsourcing.

Financial Strength

Revenue is growing steadily as the rollout of Cerner’s HER platform at the DoD and VA commence, and incremental services to existing customers and international expansion add to the muted growth of the mature domestic HER market. Non-GAAP margins are already solid, and we believe they are likely to expand further with the active rationalization of services with lower profitability and cost-saving initiatives. As of fiscal 2020, the company had over $1 billion in cash, equivalents, and investments. Cerner initiated a quarterly dividend of $0.18 per share in mid-2019, which it subsequently raised to $0.22 per share at the end of 2020.

Bulls Say

  • Cerner has been able to maintain a leading market share in the acute care EHR market due to high switching costs.
  • Despite the maturity of the domestic EHR market, Cerner’s federal contracts provide modest revenue growth through 2028.
  • Cerner’s leading EHR market share gives the company valuable RWE that can be packaged and sold to pharma companies, payers, and providers in a data offering.

Company Profile

Cerner is a leading supplier of healthcare information technology solutions and tech-enabled services. The company is a long-standing market leader in the electronic health record (EHR) space, and along with rival Epic Systems corners a majority of the market for acute care EHR within health systems. The company is guided by the mission of the founding partners to provide seamless medical records across all healthcare providers to improve outcomes. Beyond medical records, the company offers a wide range of technology that supports the clinical, financial, and operational needs of healthcare facilities.

(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

Deployment Plans Pave a Road to Improving EBITDA at Carnival in 2022

However, global travel has waned as a result of corona virus, potentially leading to longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon. As consumers slowly resume cruising after a year-plus no-sail halt (with eight of the company’s nine brands set to resume limited sailings by year-end), we suspect cruise operators will have to continue to reassure passengers of both the safety and value propositions of cruising. Aggravating profits will be the fact that the entire fleet will likely have staggered reintroductions, crimping profitability over the 2021-22 time frame, ceding scale benefits. For reference, as COVID-19 continues to wane, 52% of the fleet is expected to be deployed by November.

Financial Strength

We believe Carnival has secured adequate liquidity to survive a slow resumption of domestic cruising, with $9.3 billion in cash and investments at the end of May 2021. This should cover the company’s cash burn rate over the ramp-up, which is likely to increase from the roughly $500 million per month experienced in the first half of 2021. Since the beginning of the pandemic, Carnival has raised nearly more than $24 billion in cash via short-term debt, long-term loans and equity issuances (announcing another $500 million at the market equity issuance of June 28, 2021). By our math, Carnival has about 16 months worth of liquidity to operate successfully in a no-revenue environment. If we assume all customer deposits are refunded, this shrinks to about 12 months.

Bulls Say

  • As Carnival deploys its fleet, passenger counts and yields could rise at a faster pace than we currently anticipate if capacity limitations are repealed.
  • A more efficient fleet composition (after pruning 19 ships during COVID-19) may help contain fuel spending, benefiting the cost structure to a greater degree than initially expected, once sailings fully resume.
  • The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators had capacity for nearly 4 million passengers in 2020, which provides an opportunity for long-term growth with a new consumer.

Company Profile

Carnival is the largest global cruise company, set to deploy 52 ships on the seas by the end of fiscal 2021 as the COVID-19 pandemic wanes. Its portfolio of brands includes Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn in North America; P&O Cruises and Cunard Line in the United Kingdom; Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia. Carnival also owns Holland America Princess Alaska Tours in Alaska and the Canadian Yukon. Carnival’s brands attracted about 13 million guests in 2019, prior to COVID-19.

(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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Technology Stocks

Veeva Is a Leading Supplier of Healthcare Information Technology

Veeva’s effective technology and dominant position enables it to generate excess returns commensurate with a wide-moat company. The company’s strong retention, continued development of new applications, increasing penetration within existing customers, addition of new customers, and expansion into industries outside of life sciences should allow the company to extend its market leadership.

The company operates in two categories: Veeva Commercial Cloud, which entails vertically integrated customer relationship management (CRM) services and end-market data and analytics solutions; and Veeva Vault, a horizontally integrated content and data manager. Veeva’s CRM application supports real-time collaboration and regulatory oversight, and enables incremental add-on solutions. The incremental functionality is critical to improving marketing programs while remaining in compliance with mandated anti-kickback laws and statutes. This service has been well received by the life sciences industry and has propelled Veeva to become the leading solution with the lion share (approximately 80% market share) of this niche market. As a follow-on to the initial introduction of CRM, management introduced the Veeva Vault platform to broaden the portfolio that addresses the largely unmet needs of the life sciences industry outside of CRM. Each module offers features and functionality targeting four key areas within life sciences: clinical (R&D); regulatory (compliance); quality of manufacturing; and safety.

Financial Strength

Veeva enjoys a position of financial strength arising from its strong balance sheet (no debt) and leading position in a growing market. As of fiscal 2021 Veeva had over $1.6 billion in cash and short-term investments and no debt. The company will continue to use the cash it generates from operations to fund future growth opportunities. From our perspective, management has been disciplined about M&A and taking on debt. The 2019 acquisition of Crossix was the firm’s largest to date, at approximately $430 million.

Bulls Says

  • Veeva’s best-of-breed vertical addressing unmet needs provides opportunities to further penetrate a highly fragmented market.
  • The rapid adoption of the company’s new modules continues to entrench Veeva into mission-critical operations of customers, making it increasingly challenging for competitors to gain a foothold.
  • Veeva’s institutional knowledge and co-development partnerships with customers enable the company to develop robust offerings addressing market needs.

Company Profile

Veeva is a leading supplier of software solutions for the life sciences industry. The company’s best-of-breed offering addresses operating and regulatory requirements for customers ranging from small, emerging biotechnology companies to departments of global pharmaceutical manufacturers. The company leverages its domain expertise and cloud-based platform to improve the efficiency and compliance of the underserved life sciences industry, displacing large, highly customized and dated enterprise resource planning, or ERP, systems that have limited flexibility. As the vertical leader, Veeva innovates, increases wallet share at existing customers, and expands into other industries with similar regulations, protocols, and procedures, such as consumer goods, chemicals, and cosmetics.

(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 Philosophy

Bank on the Australian Majors Buying Back Shares

The remainder of surplus capital returned via an annual dividend top-up between fiscal 2021 and 2024, and on-market buybacks once franking balances deplete. Off-market buybacks can provide an attractive opportunity for Australian-based shareholders to sell depending on their tax circumstances. Given a large component of the buyback is treated as a dividend, and franked, the total return to the shareholder can be 20% higher than selling on market.

We think the Commonwealth Bank could kick things off in August 2021 with an approximate AUD 5.5 billion off-market buyback. However, the bank’s conservatism around loan loss provisioning and dividends during 2020 and 2021 suggests shareholders may need to wait until 2022.

Based on a target common equity Tier 1 ratio of 11%, we assume AUD 30 billion is returned to shareholders. We estimate Commonwealth Bank returns around AUD 5.50 per share, ANZ and National Australia Bank around AUD 2.20 each, and Westpac AUD 1.90. Only Westpac has enough franking credits to fully frank all returns.

Shares of the major banks trade around our fair value estimates (except for Commonwealth Bank). But we think the strong wide-moat franchises and prospects for material capital management initiatives, still make the banks attractive holdings in a fairly overvalued Australian market. Our fair value estimates assume the banks have returned excess capital to shareholders by 2025. This may occur sooner, but timing is not material to our fair value estimates. We have not included dividend top-ups in our forecasts given uncertainty around timing.

Company Profile

ANZ Bank is Australia’s third-largest bank by market value and provides retail, business, and institutional banking services to customers in Australia, New Zealand, and Asia-Pacific. The super-regional Asian strategy is being de-emphasised, with management focusing on the higher-returning businesses in Australia and New Zealand. Fine-tuning strategy and bank-wide restructuring results in a differentiated bank compared with domestic peers. ANZ Bank still retains a tilt to its Asia-centric strategy, but is now more balanced, better capitalised and a simpler bank.

(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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Shares Small Cap Technical Picks

Vornado Should Benefit From New York’s Office Recovery

The company now generates about 90% of its net operating income from New York City. While the focus is certainly on premier office properties, Vornado continues to invest in high-quality retail. Around 60% of companywide NOI comes from New York office properties, with New York retail generating around one fifth of total NOI.

In contrast with its New York office REIT peers, Vornado has made a concentrated bet on developments in the Penn District submarket just east of the Hudson Yards megaproject. The new development should have positive knock-on effects by increasing foot traffic and rents, as the project adds activity to a once-drab slice of Manhattan. Despite investor concern about oversupply in the region and the spectre of a massive rise in remote work due to the coronavirus pandemic, New York will remain a hub for global talent in the long run. With its enviable roster of blue-chip office and retail tenants, Vornado should benefit from healthy rent collections despite the coronavirus crisis.

Vornado only owns two non-New York properties in well-located central business districts in Chicago and San Francisco. In San Francisco, 555 California Street has benefited from healthy tech office demand in a supply-constrained region. In Chicago, the Merchandise Mart has likewise performed well, emerging as a hub for tech office users in the Midwest. With the completion of the Art on the Mart digital exhibition in 2018, the building is set to continue to benefit from its great location and iconic status within the Chicago office market.

Financial Strength

We view Vornado’s balance sheet as a slight concern, with the firm carrying more debt than many of its already bloated office REIT peers. We forecast 2021 debt/adjusted EBITDA to be around 11 times, with adjusted EBITDA/interest of 3.4 times. We forecast debt/EBITDA to decline gradually over the next 10 years. As a real estate investment trust, Vornado Realty is required to pay out at least 90% of its income as dividends to shareholders. Vornado’s 2020 dividend payout represented an elevated 110% of its funds from operations figure, although this is slightly obscured by acute COVID-related cyclicality.

Company’s Megaproject

Vornado’s well-located portfolio of office and retail assets attracts the highest-quality tenants. Developments near the Hudson Yards megaproject should pay off as the company benefits from increased property values in that region. Vornado’s Chicago and San Francisco properties represent some of the best assets in those markets.

Company Profile

Vornado owns and has ownership interest in Class A office and retail properties highly concentrated in Manhattan, with additional properties in San Francisco and Chicago. It operates as a real estate investment trust.

(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 Shares

Costco’s Sales Growth Remains Strong Even as Comparisons Become Harder, but the Shares Seem Rich

Its 21% revenue growth impressed considering the chain lapped the early days of the pandemic (which included significant customer stock-up activity), but we mostly attribute the results to transitory factors. So, our long-term forecast still calls for mid-single-digit percentage sales growth and 3%-4% adjusted operating margins. We suggest investors seek a more attractive entry price, particularly considering elevated uncertainty as the customer habits normalize.

Costco posted 15% comparable growth excluding fuel and foreign exchange, well ahead of our 8% target, with the outperformance likely a result of greater-than-expected demand for discretionary items and recovering warehouse traffic (stimulus likely also played a role). Costco’s 3.7% operating margin was about 50 basis points higher than its prior-year mark and our estimate, reflecting cost leverage and reduced pandemic-related expenditures.

We are encouraged that around 70% of orders of big, bulky items (generally higher-value items like furniture, exercise equipment, and electronics) are being fulfilled by Costco Logistics, which the company purchased in early 2020. We believe the shift to in-house fulfilment will lift the profitability of orders of such goods as well as delivery times and customer service levels. We also believe these larger items remain an opportunity for Costco to benefit from rising e-commerce penetration, allowing for a broader assortment than what is available in-warehouse. While we continue to expect that the core of the value proposition will remain instore (as much of Costco’s assortment skews toward bulky, low-priced consumer goods that are difficult to ship economically), we support the company’s targeted investments in expanding its digital capabilities, which also include its growing online grocery offering.

Costco Wholesale Corp Company Profile

The leading warehouse club, Costco has 795 stores worldwide (at the end of fiscal 2020), with most sales derived in the United States (73%) and Canada (13%). It sells memberships that allow customers to shop in its warehouses, which feature low prices on a limited product assortment. Costco mainly caters to individual shoppers, but roughly 20% of paid members carry business memberships. Food and sundries accounted for 42% of fiscal 2020 sales, with hardlines 17%, ancillary businesses (such as fuel and pharmacy) nearly 17%, fresh food 14%, and softlines 10%. Costco’s warehouses average around 146,000 square feet; over 75% of its locations offer fuel. About 6% of Costco’s global sales come from e-commerce (excluding same-day grocery and various other services).

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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Funds Funds

Devon Alpha Fund

This is the fourth portfolio manager change on this strategy in four years. In early

2019, Devon announced it was changing the portfolio manager to Mark Brown from Nick Dravitzki. Prior to taking the portfolio manager role, Brown had been the chief investment officer at Devon. Dravitzki had been the portfolio manager on this strategy since 2017 following previous portfolio manager Robertson’s ascension to the key business management role. This level of portfolio manager change on a strategy that allows significant flexibility for the key decision-maker rarely leads to good outcomes in the short to medium term, even with an experienced team.

The investment process seeks to identify companies in the NZX 50 and S&P/ASX 200 indexes that have the ability to generate strong returns on invested capital and achieve good cash flow expansion or have unappreciated catalysts for revaluation. The strategy allows for a portfolio of just 10-15 stocks, so the fund carries significant stock- and sector-specific risk, which may result in greater volatility than more-traditional strategies. In addition, the portfolio manager has a high level of discretion and can allocate 0-100% to New Zealand stocks, 0-100% to Australian stocks, or 0-100% to cash. Historically, cash levels have often been in the 20%-30% range but have been lower since mid-2020. The portfolio manager also has the flexibility to short-sell stocks (though we’ve rarely seen it used) and invests outside Australasia.

Since inception, the strategy’s returns have been largely lacklustre, which is not entirely unexpected given the difficulty in getting cash levels right and the portfolio manager changes.

Devon Alpha has some interesting characteristics, but the numerous portfolio manager changes constrain our enthusiasm.

Devon seeks to identify Australasian companies with the ability to produce strong returns on invested capital. Devon generates investment ideas through its fundamental research process and draws on its members’ extensive experience. On-the-ground research is an important part of the process; the team will not only visit management of companies in the portfolio and potential holdings, but also competitors, suppliers, and customers. Discounted cash flow is the most important factor in the valuation decision, ensuring the team avoids overpaying for companies. The investment decision also considers the strength of the business model, the relative attractiveness of the industry, quality of management, and the company’s financial health. These factors are assigned weightings that the portfolio manager uses in his portfolio construction process.

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 Shares

Abbott Laboratories Reduces Outlook for Pandemic-Related Diagnostics

We’d already seen a foreshadowing of softening demand for COVID-19 diagnostic tests as reference labs LabCorp and Quest Diagnostics had indicated that SARS-CoV-2 testing volume peaked in mid-December and then steadily declined through to the end of the first quarter. Considering the penetration of COVID-19 vaccination in the United States and a falling caseload in the last couple of months, we anticipate further decreases in PCR testing through the rest of this year at the labs.

The big question is to what degree demand for COVID-19 PCR testing could shift to the point-of-care, rapid antigen tests that Abbott has supplied. The U.S. government made bulk purchases of those antigen tests last year, and the test recently became widely available over the counter. However, gains in vaccinating adults and now teens in the U.S. are taking place quickly, reducing the need for rapid antigen tests. Abbott now expects $4 billion-$4.5 billion in

COVID-19 test sales in 2021 (down from the $6.5 billion it expected earlier this year), which is closer to our $4.5 billion estimate. We continue to project the diagnostics segment to decline 7% in 2022, driven by falling demand for COVID-19 tests.

Company Profile

Abbott manufactures and markets medical devices, adult and pediatric nutritional products, diagnostic equipment and testing kits, and branded generic drugs. Products include pacemakers, implantable cardioverter defibrillators, neuromodulation devices, coronary stents, catheters, and infant formula, nutritional liquids for adults, and immunoassays and point-of-care diagnostic equipment. Abbott derives approximately 60% of sales outside the United States.

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

BlackRock Global Funds – Asian Growth Leaders Fund A2 USD

The strategy is comanaged by Emily Dong and Stephen Andrews. Dong has been on the roster since the strategy’s 2012 inception alongside previous comanager Andrew Swan, who unexpectedly left the firm and was replaced by Andrews in April 2020. Andrews has 23 years of industry experience, albeit mostly on the sell-side prior to joining BlackRock in 2017. His first portfolio management stint came in April 2018 and his limited portfolio management experience was apparent during our meetings. Dong, who has 18 years of investment experience and 11 years of firm tenure, brings some continuity amid the team change. That said, while she has contributed to the strategy’s solid track record in the past, the views she provided during our meetings have tended to be undifferentiated and we have yet to build conviction on the collaboration between the comanagers.

Our confidence is further dampened by the ongoing instability within the 36-member investment team, which has notably lost several senior portfolio managers and country experts in recent years. The strategy continues to follow a style agnostic approach that combines top-down and bottom-up research, with the aim of outperforming in different market environments. After determining which style factors or sectors to rotate into, the comanagers leverage the fundamental analysts to build a concentrated 30- to 60-stock portfolio.

This is an index-agnostic and high-conviction offering compared with the team’s core Asian equity mandate BGF Asian Dragon, and management has used the flexibility to make drastic short-term position changes to reflect the team’s top ideas. While the approach is reasonable, it depends much on the managers’ intuition and experience in navigating the market, and we are sceptical of the comanagers’ ability to execute the strategy and add value on a consistent basis. Overall, the strategy does not stand out as an attractive option for investors looking for Asia ex Japan equity exposure.

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.