Tag: Recommendations

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Technology Stocks

Coupa’s ability to win customers from sticky SAP speaks for itself in terms of the strength of Coupa’s offering

Businesswoman pointing at diagram in her hands when explaining marketing trends to her team during online meeting

Business Strategy & Outlook

Coupa software is a moaty cloud-only platform in the business spending management, or BMS, space with significant market share gains to come. Coupa benefits from a narrow moat based on strong switching costs and a network effect. Coupa’s core platform allows users to procure indirect or direct spending for a company—including everything from bottled water to laptops. While these use cases vary in mission criticality, switching costs persist throughout the business from the significant implementation time and costs as well as risks involved in changing vendors. Coupa’s network effect is driven by the increased benefits each supplier and procurer gain when additional users are added to the platform. Since its founding, Coupa has enabled $3.3 trillion in spending through its platform—and such stickiness will allow cumulative spending to snowball, benefiting long-term investors. Once items are procured, Coupa’s platform enables invoicing, expense, and payment. By having all these functionalities within one system, users benefit from better visibility of their spending. Nonetheless, existing attach rates leave ample room to grow—which informs that a positive moat trend is at play—as Coupa customers continue to use more value-adding modules, which increases overall stickiness.

Coupa’s ability to win customers from sticky SAP speaks for itself in terms of the strength of Coupa’s offering, as customers are willing to forgo the synergies of having their ERP and procurement vendor all in one in order to gain benefits of Coupa’s user experience. In addition, while it can be considered Workday to be the greatest long-term threat to Coupa given its cloud-only architecture and reputation for highly intuitive human capital management and financial service software, Workday has admitted that it cannot compete effectively with Coupa. This is comforting that at least Coupa has a considerable head start, which will be protected in the long run by its hard-to-dismantle network effect.

Financial Strengths

Coupa is in good financial health. As of January 2022, Coupa had $730 million in cash and marketable securities with $1.6 billion in convertible debt. The firm is rightly focusing on growth of the business over allocating capital toward dividends or share repurchases. A large proportion of debt does not mature until 2025 and 2026, and the firm does not face material risk in terms of funding it, as it is capable of issuing $1.5 billion in additional debt if investors do not take the option to convert the debt to stock. Coupa has an ability to raise additional debt if needed, as the company boasts healthy adjusted free cash flow. Altogether, the 2025 notes have a conversion price of $159.60 while the 2026 notes have a conversion price of $296.45. While Coupa acquired Llamasoft for $1.5 billion in 2020, the large acquisition was well justified—as significant synergies can be seen between Coupa’s bread and butter, indirect spending, and direct spending-related offerings, like Llamasoft’s supply chain design functionality. Coupa will not make such hefty acquisitions over the next 10 years. While Coupa currently is not achieving excess returns on invested capital, or ROICs, the firm will be able to do so by fiscal 2026. While Coupa could be excess ROIC positive today, Coupa is making the right approach in funneling significant sales and marketing spending on new customer acquisition today to reap the long-term benefits later—as Coupa software is sticky, which informs a narrow moat rating.

Bulls Say

  • Coupa could take share within the direct spending and supply chain design market much faster than expected as frustration with other solutions nears a tipping point.
  • Coupa could be able to push boundaries further on price increases for existing offerings.
  • Regulation on reporting third-party liabilities in a timely manner could expand to other industries, further necessitating the Coupa platform.

Company Description

Coupa Software is a cloud-based provider of business spend management, or BSM, solutions. Coupa’s BSM platform provides visibility into all spend, allowing companies to gain control over their spending, optimize their supplier network and supply chains, and manage liquidity. The platform’s transactional core consists of procurement, invoicing, expense management, and payment solutions, while supporting modules ranging from strategic sourcing solutions to supply chain design and planning solutions round out the comprehensive spend management ecosystem.

(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

AllianceBernstein has the size and scale necessary to be competitive in the asset-management industry

Business Strategy & Outlook

A confluence of several issues–poor relative active investment performance, the growth and acceptance of low-cost index-based products, and the expanding power of the retail-advised channel–has made it increasingly difficult for asset managers running predominantly active portfolios to generate organic growth, leaving them more dependent on market gains to drive assets under management higher. It is still believable there will always be a room for active management, the advantage when it comes to getting placement on platforms will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

With $667 billion in managed assets at the end of August 2022, AllianceBernstein has the size and scale necessary to be competitive in the asset-management industry and is structurally set up to hold on to assets regardless of market conditions, being diversified across its three main asset class segments: equities (43% of managed assets), fixed income (40%), and other investments (made up of the firm’s asset allocation services and certain other alternative investments) accounting for the remainder. However, this has not always translated into solid organic growth or above-average profitability, with AllianceBernstein’s adjusted GAAP operating margins of 23.4% on average during 2017-21 being well below the group average of 30%.

Financial Strengths

AllianceBernstein is structured as a limited partnership, required to pay out essentially all of its available cash flows as dividends to unitholders (but allowing it to be taxed at a significantly lower rate than most corporations). The firm has traditionally managed a fairly conservative capital structure. This does not place the company at a competitive disadvantage relative to its peers, though, because most asset managers tend to carry little to no debt on their balance sheets. At the end of June 2022, AB had $800 million in debt (tied primarily to its commercial paper program) and $1.2 billion in unrestricted cash and cash equivalents on its books. The company maintains an $800 million revolving credit facility expiring September 2023, used primarily as backup liquidity for AB’s commercial paper program, and a $900 million committed unsecured senior credit facility with Equitable Holdings, which can be used for AB’s general business purposes (and where AB had $800 million outstanding at the end of June 2022 with an interest rate of approximately 0.5%). While the company’s structure as a limited partnership does limit the amount of capital that AB can allocate to other purposes, the firm does generally hold more cash than debt on its books, which along with substantial liquid investments and solid operational cash flows should enable AB to make investments in other assets/businesses from time to time.

Bulls Say

  • With nearly half of its AUM invested internationally, and 44% of managed assets sourced from non-U.S. domiciled clients, AB is one of the more global asset managers.
  • AB had $10 billion in its institutional pipeline at the end of June 2022, as well as a commitment from Equitable to invest $10 billion in the firm’s buildout of its private alternatives and private placements offerings.
  • The combination of CarVal Investors operations with AB’s private market capabilities has created a platform with $54 ($40) billion in total (fee-earning) AUM at the start of the third quarter.

Company Description

AllianceBernstein provides investment management services to institutional (46% of assets under management), retail (38%), and private (16%) clients through products that includes mutual funds, hedge funds, and separately managed accounts. At the end of July 2022, AB had $689.0 billion in managed assets, composed primarily of fixed-income (40% of AUM) and equity (43%) strategies, with other investments (made up of asset allocation services and certain other alternative investments) accounting for the remainder. The company also provides sell-side research and brokerage services through its Sanford Bernstein subsidiary.

(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

Xcel took an early lead in renewable energy development primarily due to the favorable wind conditions in its central U.S. service territories

Business Strategy & Outlook

Xcel Energy’s regulated gas and electric utilities serve customers across eight states and own infrastructure that ranges from nuclear plants to wind farms, making the company a barometer for the entire utilities sector. That barometer is signaling a clean energy future ahead. Xcel took an early lead in renewable energy development primarily due to the favorable wind conditions in its central U.S. service territories. The company now plans to invest $26 billion in 2022-26, much of it going to renewable energy projects and electric grid infrastructure to support clean energy. That could make investment climb above $30 billion in 2027-31 based on state and federal clean energy policies.

Transmission projects to support renewable energy represents about one third of Xcel’s investment plan, but that could go higher based on recent studies that show transmission is a constraint to meeting clean energy targets. Politicians and regulators in Colorado, Minnesota, and New Mexico are pushing aggressive environmental targets, which could extend Xcel’s growth potential. One example is the 460-megawatt Sherco solar project that Minnesota regulators approved in September on the site of a soon-to-close coal plant. Xcel aims to eliminate coal generation by 2034 and deliver 100% carbon-free electricity by 2050. Xcel’s investment plan gives investors a transparent runway of 6% to 7% annual earnings and dividend growth potential. However, realizing this growth requires political, regulatory, and customer support for clean energy investments, particularly in Xcel’s largest jurisdictions, Colorado and Minnesota, where it plans to invest $20 billion in 2022-26. Xcel’s substantial growth investment plan results in more regulatory risk than its peers. Xcel has made substantial progress in recent years bringing earned returns closer to allowed returns through constructive regulatory negotiations across its system. Lower energy costs have helped keep customer bills mostly flat despite higher infrastructure charges. Regulatory support for Xcel’s growth investments could wane with rising energy prices.

Financial Strengths

Xcel Energy has a strong financial profile. Its biggest financial challenge is raising enough capital at reasonable prices to fund its $26 billion investment plan during the next five years with minimal equity dilution. Most of Xcel’s planned investments benefit from favorable rate regulation, but regulatory lag could weigh on cash flow. Xcel’s strong balance sheet has helped it raise capital at attractive rates. The company is to maintain EBITDA/interest coverage near 5 times as long as regulators grant timely rate increases. Xcel’s consolidated debt/ capital leverage ratio could creep toward 60% during its heavy spending in 2023-25, but there are normal levels around 55%, which includes $1.7 billion of long-term parent debt. Parent debt boosts shareholder returns on equity about 100 basis points, offsetting some of the regulatory lag. Xcel has $3.9 billion of refinancing needs in 2022-26 and it will need more than $7 billion of new debt. Xcel has been issuing large amounts of new debt since 2019 at coupon rates around 100 basis points above U.S. Treasury yields. Xcel took care of its equity needs for at least the next two years with a forward sale in late 2020 to raise $720.9 million at $61 per share. This followed a $459 million forward sale initiated in late 2018 at $49 per share. These were good moves with the stock trading above the fair value estimate when the deals priced. The board has accelerated its dividend increases the past few years. The $0.11 per share annualized raises for 2021 and 2022 bring the dividend to $1.94. This is still at the low end of management’s 60%-70% payout target for 2022, so annualized increases will have to start climbing near 7% to keep up with earnings growth and management’s payout target.

Bulls Say

  • Xcel has raised its dividend every year since 2003, including a 6% increase for 2022 to $1.94 per share & similar dividend growth going forward is expected.
  • Renewable energy portfolio standards in Minnesota and Colorado are a key source of support for wind and solar projects.
  • The geography of Xcel’s service territories gives it among the best wind and solar resources in the U.S. and a foundation for growth.

Company Description

Xcel Energy manages utilities serving 3.7 million electric customers and 2.1 million natural gas customers in eight states. Its utilities are Northern States Power, which serves customers in Minnesota, North Dakota, South Dakota, Wisconsin, and Michigan; Public Service Company of Colorado; and Southwestern Public Service Company, which serves customers in Texas and New Mexico. It is one of the largest renewable energy providers in the U.S. with nearly half of its electricity sales coming from carbon-free energy.

 (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

AstraZeneca’s pipeline is emerging as one of the strongest in the drug group, and the company is developing several key products that holds blockbuster potential

Business Strategy & Outlook

AstraZeneca has built its leading presence in the pharma and biotech industry on patent-protected drugs and a developing pipeline that adds up to a wide moat. The replenishment of new drugs is offsetting the past patent losses on gastrointestinal drug Nexium and cholesterol reducer Crestor, and the company is well positioned for growth. AstraZeneca’s pipeline is emerging as one of the strongest in the drug group, and the company is developing several key products that hold blockbuster potential. In particular, the company’s recently launched cancer drugs Tagrisso and Imfinzi are well-positioned based on leading efficacy in hard-to-treat cancers. These drugs should also carry strong pricing power, driving the potential to expand Astra’s margins. Also, Astra is well-positioned in the respiratory and diabetes spaces, but these areas tend to have poor pricing power relative to cancer drugs.

In addition to internal development, AstraZeneca has aggressively pursued acquisitions, with mixed results. The ZS Pharma acquisition yielded an interesting hyperkalaemia drug, but delays in getting the drug to the market have been concerning. However, the partial stake in Acerta looks to be developing well with new blood cancer drug Calquence, and joint development with Daiichi Sankyo on cancer drug Enhertu looks promising. Also, the recent acquisition of Alexion looks like a solid strategic move done at a reasonable price. As Astra’s next generation of drugs launch, there are expected operating margins to improve based on the strong pricing power of the new drugs and the operating leverage the firm should attain as the new drugs reach critical mass. Also, as the new drugs launch, Astra is reducing the asset divestiture strategy it employed to help bridge the massive patent losses facing the firm over the past few years until the newer drugs were ready. While the asset sales helped prop up earnings and support the dividend during a challenging time, the strategy is not maintainable. As new drugs gain traction, Astra will likely continue to reduce the asset sales, which is strategically sound but will likely create a minor headwind to earnings growth.

Financial Strengths

Astra continues to generate robust cash flows, and the firm’s balance sheet is in solid shape, closing 2021 with debt/EBITDA of close to 4 times, a bit higher than normal due to the recent Alexion acquisition. While the acquisition added significant debt, it is expected the strong acquired drugs to produce robust cash flows to quickly pay down the acquisition-related debt. A projected debt/EBITDA ratio of 1.0 times by 2024 with the cash flow derived from acquired drugs and the robust sales growth of Astra’s other drugs.

Bulls Say

  • The company is expanding its oncology presence with several important pipeline products. In particular, the company’s EGFR drug Tagrisso holds major blockbuster potential in lung cancer.
  • The management team is focusing the pipeline toward unmet medical need, which should increase the odds of success and bring strong pricing power for the new drugs.
  • AstraZeneca has a large presence in emerging markets and should benefit from these markets’ fast growth prospects.

Company Description

A merger between Astra of Sweden and Zeneca Group of the United Kingdom formed AstraZeneca in 1999. The firm sells branded drugs across several major therapeutic classes, including gastrointestinal, diabetes, cardiovascular, respiratory, cancer, and immunology. The majority of sales come from international markets with the United States representing close to one third of its sales.

 (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

Novartis Holds a Wide Portfolio of Drugs That Support Steady Cash Flows

Business Strategy & Outlook

With strong positions in multiple key therapeutic areas, Novartis is well positioned for steady long-term growth. Strong intellectual property supporting multibillion-dollar products, combined with an abundance of late-pipeline products, creates a wide economic moat. While patent losses on anaemia drug Exjade and cancer drug Afinitor will weigh on near-term growth, a strong portfolio of drugs along with a robust pipeline should ensure steady long-term growth. Novartis’ drug segment is poised for long-term growth driven by new pipeline products and existing drugs. Novartis’ strategy to focus largely in areas of unmet medical need should strengthen the firm’s pricing power.

 Additionally, Novartis differentiates itself by its sheer number of blockbusters, including Entresto for heart failure and Cosentyx for immunology diseases. Also, it has generated a strong late-stage pipeline with recent launches of migraine drug Aimovig and cancer drug Kisqali. Despite the patent losses on Exjade and Afinitor (and potentially multiple sclerosis drug Gilenya), the combination of a strong pipeline of new products and a diverse, well-positioned operating platform should translate into steady growth. Beyond the branded drug segment, Novartis also sells generic drugs through its Sandoz division. While the basic generic drugs typically offer more limited profits, the focus of Novartis’ generic unit on hard-to-make drugs like biologics, which should offer higher growth pathways and stronger margins. Novartis is getting more focused with its recent spin off of its eye care division, Alcon. While the drug division markets eyecare drugs, one can view the overlap with Alcon’s surgical and vision-care products as relatively minor. As a result, one cannot expect many dyssynergia by spinning off the Alcon business. The spinoff is in line with Novartis’ strategy to focus on human prescription drugs, which has been playing out over the past several years with the divestitures of the vaccine, animal health, and consumer healthcare businesses.

Financial Strengths

Novartis carries a solid financial position with debt/2023 projected EBITDA of 1.5 times and free cash flow after capital expenditures/debt of close to 0.5. Further, its diverse platform of drugs should translate into steady cash flows to easily service debt requirements. Novartis primarily uses its cash to fund its dividend, which represents close to 60% of the company’s core earnings. The continued dividend increases but at a slow rate over the next few years. Additionally, the company will continue to pursue acquisitions, which are likely to be funded by cash from operations and occasionally increased debt.

Bulls Say

  • Novartis’ solid late-stage pipeline should propel long-term growth. The company should launch several new drugs during the next several years in critical therapeutic areas such as immunology and oncology. 
  • Novartis recently divested its Roche share, yielding over $20 billion, which provides the firm with increased options to re-deploy capital. 
  • Novartis’ research and development focuses on areas of unmet medical need, which should yield several innovative drugs with strong pricing power.

Company Description

Novartis AG develops and manufactures healthcare products through two segments: Innovative Medicines and Sandoz. It generates the vast majority of its revenue from Innovative Medicines segment consisting of global business franchises in oncology, ophthalmology, neuroscience, immunology, respiratory, cardio-metabolic, and established medicines. The company sells its products globally, with the United States representing close to one third of total revenue.

(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

CGI Has an Embedded Competitive Position in North American and European Government Agencies

Business Strategy & Outlook

CGI is a leading global IT services firm, catering a bit more to governmental agencies than its peers, while providing managed IT, consulting, and IP solutions. The CGI benefits from strong switching costs and intangible assets, the combination of which leads to assign the firm a narrow economic moat rating. Despite the economic headwinds brought on by COVID-19, CGI has posted steady revenues due to its long-term contracts with many of its clients, and such stability will continue with the help of a stable trend for both CGI’s switching costs and intangible assets, which both work to create stickiness amongst existing customers. CGI has long operated differently from many of its peers, focusing more on a proximity-based operating model that places CGI offices near its clients. While the firm’s offshore leverage is lower than many of its peers, it still provides global delivery centers. Nonetheless, the proximity model is important for the firm’s government vertical as governments often require data to remain within their sovereign borders to better ensure data security. There are trade-offs to CGI’s government focus. On one hand, it creates even greater stickiness as The government vertical has marginally stronger switching costs than enterprises. Yet, CGI’s growth potential is more limited than its peers due to the greater resources the enterprises have to invest in themselves. On top of the switching costs, CGI also possesses intangible assets in the form of expertise the company has and continues to acquire. With an eye on the future, the CGI to benefit from vendor consolidation through its ‘build and buy’ strategy as it continues to acquire smaller IT firms, with their own niche expertise, to gain access to localized markets across the globe.

Financial Strengths

The CGI’s financial health is in good shape. CGI had CAD 1.7 billion in cash and equivalents at the end of fiscal 2021, with debt of around CAD 3.6 billion. This leveraged position, especially in comparison with its Indian IT Services counterparts which tend to have low debt levels, is a result of CGI’s more recent European acquisitions that have been funded, in part, by debt. Whereas a net debt to net capital ratio of 21% may appear to be high within this industry, the firm’s ability to generate free cash flow over a billion dollars on an annual basis should enable it to pay down its debt without the debt posing any material risk to the firm’s operations. The firm also has access to an unsecured committed $1.5 billion credit revolver set to expire in December 2024.

Bulls Say

  • CGI has an outsize presence in the government vertical, which could lead to further growth if government agencies place increasing importance on total investment in IT needs. 
  • Increased vendor consolidation could allow bigger IT services players such as CGI to expand their client base at the cost of smaller, more local players 
  • CGI’s recent European acquisitions may benefit the firm in making inroads into the European market, resulting in material margin expansion.

Company Description

CGI Inc. is a Canada-based IT-services provider with an embedded position in North America and Europe. The company generates more than CAD 12 billion in annual revenue, employs over 88,000 personnel, and operates across 400 offices in 40 countries. CGI offers a broad portfolio of services such as consulting, systems integration, application maintenance, and business process services, or BPS. The company’s largest vertical market is government, which contributes more than a third of group revenue.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Shares Small Cap

ARB retained a strong balance sheet with cash reserves of $52.7m and no debt at FY22-end

Investment Thesis:

  • Current trading multiples adequately price in the near-term growth opportunities, in our view. 
  • Experienced management team and senior staff with a track record of delivering earnings growth.  
  • Strong balance sheet with no debt at FY22-end.
  • Strong presence and brands in the Australian aftermarket segment.
  • Growing presence in Europe and Middle East and potential to grow Exports.
  • Growth via acquisitions

Key Risks:

  • Higher than expected sales growth rates. 
  • Any delays or interruptions in production, especially in Thailand which happens on an annual basis.
  • Increased competition in the Australian Aftermarket especially with competitors’ tendency to replicate ARB products.
  • Slowing down of demand from OEMs. 
  • Poor execution of R&D.
  • Currency exposure

Key Highlights:

  • FY22 Results Highlights. Relative to the pcp: Sales of $694.5m, was up $71.5m or +11.5% over the previous year sales of $623.1m. Continuing sales growth was strong, driven by Australian Aftermarket and Export categories, whilst sales to Original Equipment Manufacturers were in line with last year as previously communicated, and considering the significant +33.9% sales growth achieved in the prior year, despite management highlighting “continuing constraints in new vehicle availability and ongoing personnel and supply chain challenges”. Management noted “sales to the Australian Aftermarket and Export markets were significantly impacted in the second half by the emergence of the Omicron Covid-19 variant in January and February 2022, resulting in abnormally high staff absenteeism, and by ongoing limited new vehicle availability. Sales into Export markets were also impacted in the second half by the outbreak of war in Ukraine”. 
  • Profit before tax of $165.7m, up +10.4% was broadly in line with sales revenue growth of +11.5%.
  • Earnings (NPAT) of $122.0m, up +8.1% on the reported NPAT of $112.9m in the previous year.
  • Cash flows generated from operations of $84.6m declined by $18.6m compared with the previous year due to an increase in inventories of $50.7m as ARB looked to mitigate increased supply chain lead times and ongoing disruptions. 
  • ARB currently has a larger than normal capex programme due to the anticipated completion of the new 30,000 square metre factory in Thailand in December 2022, ongoing construction of the corporate head office in Melbourne, Australia, and development of ARB New Zealand site in Hamilton, New Zealand, to consolidate the Beaut Utes and Proform businesses. 
  • The Board declared a final fully franked dividend of 32.0cps, which brings total dividends to 71.0cps fully franked, up +4.4% compared with last year. 
  • ARB retained a strong balance sheet with cash reserves of $52.7m and no debt at FY22-end. 
  • Performance Highlights by Segment. ARB saw strong sales growth of 25.6% in 1H22, which contrasts to a small decline of -1.1% in sales in 2H22, compared with the pcp. Comparing 2H22 versus 1H22: Australian Aftermarket. Sales of $183m in 2H22 versus $191m in 1H22 represent a -4.0% decline. Australian Aftermarket sales remained relatively consistent at 53.8% of ARB’s sales. According to management, “new vehicle sales in Australia declined by 2.1% over the last financial year, however new vehicle sales of ARB’s target vehicles, being four-wheel drive utilities and SUVs, grew by 0.3%. Demand for second hand 4WD vehicles globally continues to be strong and product sales for used 4WD vehicles remains an important part of ARB’s business”. ARB opened four new stores in Melton and Sale, Victoria, in Rutherford, New South Wales, and in Karratha, Western Australia. This brings the total number of ARB stores to 74, of which 30 are Company owned. 
  • Export. Sales grew +17.4% over FY22 and represented 38.7% of ARB’s sales, up slightly on FY21. Sales of $131m in 2H22 versus $138m in 1H22 represent a -5.1% decline.  Over FY22, sales growth was achieved in all regions: the Americas, Asia/Pacific and the Rest of the World, despite constraints in new vehicle availability especially in the UK where ARB’s operations are heavily reliant on product fitment to new vehicles rather than fitment to used vehicles”. 
  • Original Equipment Manufacturers. Segment sales equate to 7.5% of ARB’s total sales. Despite sales of $21m in 2H22 versus $30m in 1H22 representing a -29.8% decline, ARB saw overall FY22 OEM sales growth of +0.2% after a record +73.9% sales increase last year. According to management, the decline in 2H22 OEM sales “was expected and reflects the timing of new contracts and OEMs stocking up during calendar 2021 for new model releases”.

Company Description:

ARB Corporation Ltd (ARB) designs, manufactures, distributes, and sells 4-wheel drive vehicle accessories and light metal engineering works. It is predominantly based in Australia but also has presence in the US, Thailand, Middle East, and Europe. There are currently 61 ARB stores across Australia for aftermarket sales.

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

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

Swiss Re Is an Undervalued and Fairly Run Reinsurer

Business Strategy & Outlook

Swiss Re has a history of overly aggressive expansion and typically too much leverage. The first example of this can be seen in the acquisition of General Electric Insurance Solutions in the earlier part of the new millennium. This was financed through a combination of debt and share issuance, a historic and largest Swiss Re acquisition in that period. Furthermore, Swiss Re continued down a path of building out its reinsurance securitization offering, structuring pools of credit, mortality and natural catastrophe risk. This did not work out well because the Swiss Re increased correlation and dependence and when financial markets fell so did the value of these securities. Swiss Re’s leverage position and problems with its securitization program led the business to complete a capital raise and take on Berkshire as a preferential terms’ investor. This investment built on a previously established relationship where Berkshire reinsured substantially all of Swiss Re’s yearly renewable-term United States mortality book, another area where Swiss Re had run into difficulties. 

The latest round has been aggressive expansion for commercial insurance and this came back to bite the business. What is a business that is still overleveraged and one where the levels of debt do need to be addressed? However, from an operational perspective one can see a company that is focusing on building a cleaner and more traditional reinsurance business, one that focuses on underwriting and shifts away from reliance on investment returns to fund unprofitable long-tailed lines of underwriting. One can see a turnaround in corporate solutions starting to come to fruition and the nascent stronger move into more specialist lines of business and find the management team to be a lot more disciplined. However, one would like to see the business reign in its buybacks and concentrate more on building out the long-term profitability of this business.

Financial Strengths

Swiss Re does not have a particularly strong balance sheet. It would help the business immensely if management chose to pay down more debt. Swiss Re has around $11.2 billion of debt. The majority of this is long term, and the most substantial portions don’t mature for a few years. The shape of the debt isn’t well balanced, with the vast majority issued as subordinated. This means there are some pockets of very high interest rates and this is reflected in the broader group’s interest. Swiss Re pays an annual dividend that it intends to grow annually in line with long-term earnings growth and maintain the prior year’s dividend as a minimum level. The business also actions buybacks, though given the macro uncertainty it would be prudent if the business held off over the next few years from doing this.

Bulls Say

  • Swiss Re looks to be on the cusp of producing consistent results in the long term under the performing commercial insurance division. 
  • The quality of Swiss Re’s investment portfolio is high. 
  • Swiss Re pays a good dividend.

Company Description

Swiss Re was established in 1863 in Zurich. Since then, the business appears to have cycled through quite a few strategies. Namely in the early part of the millennium Swiss Re took on an investment banker who eventually led the business. Over the next 10 years CEO Jacques Aigrain built Swiss Re’s financial solutions into a powerhouse and helped the company complete its first securitization, finalized in 2005 for credit reinsurance. This division became a leader for Swiss Re but then disaster struck during the global financial crisis. Swiss Re mothballed this unit and approved a CHF 5 billion capital raise. Now the business concentrates more fundamentally on property and casualty, life and health reinsurance. Swiss Re also has a good commercial insurance offering named corporate solutions.

(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

Cochlear is investing significantly to increase awareness as well as funding research to support payer reimbursement

Business Strategy & Outlook

Cochlear is the market leader in cochlear implants with a consistent share of roughly 60% across developed markets. Cochlear implants became the standard of care many years ago for children in developed markets with profound hearing loss or deafness. With this market segment largely penetrated, the company is looking elsewhere for growth with developed-markets adults the next primary focus and emerging-markets children after that. Roughly 70% of units are sold to developed markets and the remaining 30% to emerging markets, where over 90% are for children. Large price differentials in the lower range of products result in 80% of revenue being earned in developed markets and 20% in tender-oriented emerging markets. The average unit prices achieved in developed markets are double those in emerging markets. In the developed-markets children segment, the growth tailwinds from increasing market penetration and the shift from single to bilateral implants over the last 15 years have played out, and forecast growth in this segment to reduce to the birth rate over time.

The adult developed market is more difficult to penetrate, and required investment to expand this segment will restrain significant operating margin expansion. Currently, penetration is still estimated to be under 5%, and Cochlear is at a pivot point as it invests to be adopted more widely by seniors with profound hearing loss. Prevalence of profound hearing loss increases over 65 years and has a steep increase over 80 years of age. As such, an ageing population and low penetration suggest a large opportunity. However, hearing aids, not cochlear implants, are the standard of care. Cochlear is investing significantly to increase awareness as well as funding research to support payer reimbursement. But two main challenges can be seen to accessing this market fully: first, the relatively low willingness of older candidates to undertake such invasive surgery, and second, the improvements

in hearing aids. The hearing aid market is increasing its penetration in the severe hearing loss category, leaving only the smaller profound hearing loss as the cochlear implant niche.

Financial Strengths

The company has typically enjoyed low capital intensity and high cash conversion, affording it to pay out 70% of earnings as a dividend. However, with the confluence of operational weakness due to deferred elective surgeries as a result of the coronavirus, a peak in the capital cycle, and a patent infringement penalty becoming payable, the company faced a liquidity crunch. Consequently, it completed an AUD 850 million equity raise in fiscal 2020, adding an additional 10% to shares on issue and forecast the company to carry no net debt for the foreseeable future. The company is not acquisitive and organic growth is driven by R&D spending of roughly 12% of revenue per year.

Bulls Say

  • There are signs Cochlear is looking to expand beyond the hearing market with the investment in Nyxoah, a company focused on development of a hypoglossal nerve stimulation therapy for the treatment of obstructive sleep apnea.
  • The annuity like revenue stream from sound processor upgrades and accessories is an increasingly important component of the revenue stream.
  • Cochlear earns ROICs well ahead of the cost of capital even in bear-case scenario, which is testament to the high quality of the company.

Company Description

Cochlear is the leading cochlear implant device manufacturer with around 60% global market share. Developed markets contribute 80% of group revenue where cochlear implants are the standard of care for children with severe to profound hearing loss. The company also actively targets the growing cohort of seniors in developed markets. Tender-oriented emerging markets contribute the remaining 20% of group revenue. Main products include cochlear implants, bone-anchored hearing aids, and associated sound processors. In fiscal 2020, 49% of revenue came from the Americas, 35% from Europe, the Middle East, and Africa, and 16% from the Asia-Pacific segment.

(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

Treasury’s volume share gains and positive mix shift support strong enough brand assets

Business Strategy & Outlook

Treasury Wine Estates has increasingly focused on building high-end brands in its portfolio, particularly in luxury (bottles priced above AUD 20) and “masstige” (bottles priced from AUD 10 to AUD 20) wine. With this focus, the company’s revenue from higher-end wines has risen to over 90% in fiscal 2022 from 43% in early 2014, both from growth in its high-end products and purposeful reduction of low-end, or commercial, wine sales. Continued end-market premiumization to benefit Treasury, leading to market share gains in Australasia and North America, which together made nearly half of operating earnings in fiscal 2020. In recent years, global wine consumption has proven sluggish, but high-priced wines have bucked this trend, with luxury and masstige volumes growing at mid- to high-single-digit rates in developed regions such as Australia and the U.S., per company estimates. However, Treasury faced an installation of a sizable tariff against its imported product in China in fiscal 2021, effectively shutting the door in what was arguably Treasury’s most important market, comprising 30% of earnings in fiscal 2020. The company plans to reallocate some of this wine to other markets, but the associated sales and marketing efforts will take time, reducing growth from previous expectations.

Treasury also faces risks from unfavorable weather effects, sensitivity to the consumer cycle, and inelastic industry supply that frequently results in wine gluts or shortages. That said, the diversity of Treasury’s grape and bulk wine supply should significantly mitigate these concerns. And bringing in a significant proportion of its grape and bulk wine from outside suppliers increases the proportion of variable costs and ensures a lower-cost supply in times of surplus. But it cannot be believed Treasury’s volume share gains and positive mix shift support strong enough brand assets to offset industry fragmentation, a proliferation of branded offerings, limited customer switching costs, and potential for changing consumer tastes. As such, despite a strong position in Australia, the company will likely continue to combat competitive pricing and promotional activity globally.

Financial Strengths

Treasury is in good financial health. The firm’s net debt/adjusted EBITDA ratio, including operating leases stood at 1.8 times at June 2022, and EBITDA to cover interest expense (including operating leases) an average of 8 times over the next five years. The company’s next major debt maturity is in fiscal 2024, but there are no issues either relaying or refinancing this payment. At June 2021 the company’s liquidity, comprising cash and undrawn committed debt facilities, was solid at approximately AUD 1.3 billion. Over the long run, there’s probably some room for additional debt, given management’s target of net debt/adjusted EBITDA of 2.0 times through the cycle, potentially stretching to 2.5 times, compared with the low levels today. That said, the company will remain focused on maintaining an investment-grade credit profile. The company aims to pay out 55%-70% of its earnings as dividends; an average of about 65% over the next five years. Treasury can continue to pay out dividends near the top of this range, but anticipate dividends to be only partially franked from fiscal 2025. While Treasury is an Australian taxpayer, the majority of earnings are derived outside Australia, and the available franking credits to be exhausted more quickly than they are replenished over the coming years.

Bulls Say

  • Wine consumption growth in Asia should continue growing at high rates over the long run, and is a high margin business for Treasury given a focus on luxury and mid-range wine. 
  • Treasury’s focus on higher-priced wine than in the past puts the company on-trend in global wine, and should drive substantial earnings growth as profitability expands. 
  • Additions of new high-end wine brands, either organically or through acquisition, drive better grape utilization, improving margins, and higher ROICs.

Company Description

Treasury Wine Estates is an Australia-based global wine company that demerged from Foster’s Group in 2011. The company is among the world’s top five wine producers, and owns a portfolio that includes Australian labels such as Penfolds and Wolf Blass, U.S. wines like Chateau St Jean and Sterling, and newly launched names such as 19 Crimes and Maison de Grand Esprit. An acquisition of Diageo’s wine business in 2016 added additional U.S. brands including BV and Stags’ Leap. Treasury owns over 130 wineries, with more than 13,000 planted hectares.

(Source: Morningstar)

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