Tag: Recommendations

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Dividend Stocks

Itaú Should Benefit From Rising Interest Rates, but Uncertainty in Brazil’s Economy Still a Concern

Business Strategy & Outlook

The challenge for Itaú Unibanco will be to navigate an increasingly volatile Brazilian economy and uncertain political environment, which has been hit by the dual shocks of the pandemic and rapidly rising inflation, which exceeded 12% in April 2022. In response, the Brazilian central bank has rapidly increased interest rates, taking the SELIC rate from 2% at the start of 2021 to 13.25% by June 2022. The bank benefits from rising interest rates, as Brazil’s central bank attempts to fight inflation, but there is risk that economic fallout from rapidly increasing rates could lead to lower loan growth and higher credit losses for the bank. As pandemic conditions have eased, Itaú has refocused on individual lending, driving the bank’s impressive loan growth during 2021 and so far in 2022, with credit cards and mortgages leading the way. With a slew of government guarantee programs for small and midsize enterprises and fiscal stimulus spending, the bank’s credit costs during the pandemic have been surprisingly low. However, these same programs have contributed to Brazil’s growing inflation and budgetary issues, which now must be reined in through severe interest rate increases. While one does expect credit costs to normalize over time, low charge-offs and a surge in deposits have allowed Itaú to expand its loan book significantly. 

Itaú Unibanco appears to be positioning itself as a regional money center in Latin America, with operations across Chile, Uruguay, Paraguay, Colombia, and Argentina. Though there are difficulties in such an approach, the bank has been able to diversify its asset growth and simultaneously reduce its exposure to the notoriously volatile Brazilian real. With nearly 30% of loans outstanding held abroad, the bank is in position to benefit from Latin American emerging-market growth. However, in the near to medium term Itaú’s results will be impacted by Brazil’s struggles as the country heads into the 2022 election cycle. Itaú faces a more hostile approach from regulators in recent years, with the central bank’s efforts to increase competition through the launch of the successful Pix payment system and support for the open banking movement.

Financial Strengths

Itaú Unibanco has a common equity Tier 1 ratio of 11.1% as of March 2022. The bank’s Tier 1 ratio is 12.5%, as it holds 1.4% of additional Tier 1 capital in hybrid debt and equity securities. While management has said at times that the bank has been overcapitalized, that Itaú has done well to avoid increasing leverage at a time when Brazil’s economic prospects were challenged. The strong capitalization entering the recent crisis permitted the bank to expand its aggregate loan book by more than 15% during 2021 after growing nearly 22% in 2020. Net charge-offs for the bank have been low, a result of government guarantees and fiscal stimulus, which to normalize as the impact of the central bank’s interest rate hikes is felt in the Brazilian economy. That said, Itaú is in a decent position to withstand higher credit costs as its balance sheet is in good shape.

Bulls Say

  • Rising interest rates in Brazil create an opportunity for Itaú to expand its net interest margin. 
  • Itaú has been able to significantly expand its foreign lending operations, diversifying the bank and reducing its exposure to the volatile Brazilian market. 
  • Credit losses in Brazil remain well below historical norms, allowing Itaú to generate good returns on its lending operations.

Company Description

Itaú Unibanco is the largest privately held bank in Brazil, the result of the 2008 merger between Banco Itaú and Unibanco. In addition to Brazil, the bank has significant operations in Chile, Colombia, Argentina, Uruguay, and Paraguay. Its commercial and consumer loans account for 36% of the bank’s total loans each, while foreign loans now account for 28% of the bank’s portfolio. Itaú also operates the fifth-largest insurer in Brazil and is the second-largest asset manager in the country, giving it broad reach over the Brazilian financial system.

(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

Smith & Nephew Faces Price Pressure; Giving a Slight Haircut to The Fair Value Estimate

Business Strategy & Outlook

Impressive innovation has allowed Smith & Nephew to carve out a slice of the orthopedic, sports medicine, and wound-care markets. Though the company is smaller than the dominant orthopedic competitors, it has punched above its weight in terms of introducing meaningful innovation with its pioneering hip resurfacing implant and knee replacements with Verilast technology, which it contends can last for 30 years. These are significant improvements that exceed the evolutionary innovation typically seen in orthopedics. Nevertheless, as the competitive set consolidates, Smith & Nephew’s position as a midsize competitor leaves it vulnerable as the hospital customer base seeks to reduce vendors to save costs. The firm’s market share–about 10% of hips and knees–translates into a tenuous position. Share shifts in this market are glacial at best, thanks to significant switching costs, and new technology does not necessarily overcome those switching costs. 

Smith & Nephew’s strong show of meaningful innovation translated into a mere 200-basis-point gain in share over the past decade. This showdown between technical innovation and the stickiness of surgeon preference underscores how difficult it is to induce practitioners to switch. This dynamic and Smith & Nephew’s smaller user base mean the firm could find itself locked out of more hospitals and healthcare systems in the future. The firm has been aggressively pivoting to reduce its reliance on large-joint replacement with the acquisition of ArthroCare for its arthroscopy and sports medicine presence, concerted efforts to penetrate emerging markets, and the new additions of Osiris Therapeutics for its regenerative products and Leaf Healthcare’s pressure sore-monitoring system. The jury is still out on whether this is enough to allow Smith & Nephew to compete effectively against competitors that continue to grow larger and remain independent. As the market moves gradually toward more vendor consolidation, one would not be surprised to see Smith & Nephew eventually pair up with a larger rival, such as Stryker or Johnson & Johnson, in order to better compete.

Financial Strengths

So far, there’s a little to make one nervous about Smith & Nephew’s financial flexibility. While the firm has periodically made acquisitions, it has also generated enough cash to deleverage in relatively quick fashion. For example, following the acquisitions of Osiris in 2019, debt/EBITDA rose to just over 4 times, but has moderated since then. Smith & Nephew can easily meet its interest obligations many times over. Prior to the pandemic, the firm consistently held net debt/EBITDA around 1 time. As one can see with other med tech firms, Smith & Nephew issued debt in 2020 to enhance its cash cushion in the face of uncertainty. With procedure volume resuming, the firm ended the year with net debt/EBITDA around 2.3 times and for further deleveraging in the ensuing years. This still leaves plenty of flexibility for management to leverage up, if management decides to further round out Smith & Nephew’s portfolio in adjacent areas to its core markets. At this point, the firm can fund ongoing operations and support its intention to make regular share repurchases with its cash flow, but it may use debt financing for more large acquisitions.

Bulls Say

  • Smith & Nephew participates in the fast-growing sports medicine arena thanks to its extensive arthroscopy portfolio. 
  • A strong arthroscopy presence in ambulatory surgical centers leaves Smith & Nephew well positioned to expand its large joint footprint in that setting. 
  • Smith & Nephew has been building out its presence in emerging markets. Considering the obstacles in developed markets that keep it from transforming into a top-tier player, S&N may enjoy greater upside in developing markets.

Company Description

Smith & Nephew designs, manufactures, and markets orthopedic devices, sports medicine and arthroscopic technologies, and wound-care solutions. Roughly 42% of the U.K.-based firm’s revenue comes from orthopedic products, and another 30% is sports medicine and ENT. The remaining 28% of revenue is from the advanced wound therapy segment. Roughly half of Smith & Nephew’s total revenue comes from the United States, just over 30% is from other developed markets, and emerging markets account for the remainder.

(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

Recession-Resistant McDonald’s Offers Attractive Restaurant Exposure Amidst Tough Times

Business Strategy & Outlook:    

As the leader in global food-service sales, McDonald’s is taking adequate steps to adjust to an evolving competitive landscape, leveraging its scale to invest heavily in digital acuity and menu innovation en-route to compelling unit economics. A turbulent couple of quarters amidst a quickly deteriorating macroeconomic environment (and a stubbornly persistent global pandemic), and encouraged by management’s vision for the business, which should enable McDonald’s to maintain its edge. The firm has widely embraced customer centricity and technological prowess since its 2015 turnaround, and while the processes have evolved since then, the firm’s focus on the customer experience has not. Recent initiatives, including the loyalty program launch, a large breast chicken sandwich line, and test-marketing a McPlant burger, attest to a more finely tuned sense of market demands. Though the velocity growth plan laid the groundwork for better products and unit-level performance, that management’s new “Accelerating the Arches” framework better capitalizes on the firm’s cost advantages in marketing and technology investments. The plan focuses on a unified marketing approach, a commitment to the core menu, and an emphasis on the three D’s: delivery, digital, and drive-thru. 

With nearly a third of orders now coming through digital channels, that the pivot is warranted and see long-term upside through labor efficiency, improved order accuracy, and suggestive selling, particularly following a year that saw mid-teens labor cost inflation in the industry. With the notoriously slow-moving restaurant industry forced to make widespread investments in technology in 2020 and 2021, omnichannel ordering capabilities to become a required offering from larger players. McDonald’s mobile application, loyalty program, and recent efforts toward order automation and suggestive selling represent steps in the right direction, with customization, targeted promotions, and increased penetration of the delivery channel offering alluring opportunities to the operators able to get ahead of the curve.

Financial Strengths: 

McDonald’s financial strength as sound, with the firm maintaining an investment-grade credit rating and reasonable leverage relative to its competitive set. Debt/EBITDA clocked just north of 3 turns at year-end 2021 (within the long-term guidance range of 3-3.5 times). Solid free cash flow generation (averaging 42% of revenue through 2024) and high EBIT coverage of interest payments (nearly 8 times for 2022) should be more than sufficient to meet near-term obligations while leaving investment plans and dividends untouched. While they acknowledge differences in financing philosophies with private equity ownership, McDonald’s sports substantially lower leverage than Restaurant Brands International and Yum Brands, two of its largest peers in the QSR space, which operate with around 5-6 times debt/EBITDA. The company’s commitment to maintaining an investment-grade credit rating strikes us as prudent, with corporate strength tending to correspond to more attractive franchisee borrowing rates (and increased unit-level profitability), bolstering the brand intangible asset. Finally, the firm maintains substantial cash flow flexibility, with clearly demarcated priorities of growth capital investment, payment of common stock dividends, and share buybacks. The forecasted total returns to shareholders of $19.9 billion between 2022 and 2024 and recognize that $6.5 billion in modeled share buybacks during that period provides a healthy cushion that could easily be repurposed to meet debt service or pursue attractive investment opportunities. With stability of cash flows driven by an increasingly franchised model and well-matched future minimum rent receipts and debt service payments.

Bulls Say: 

  • With 65% of global stores featuring a drive-thru and more than 80% of stores offering home delivery, McDonald’s is well positioned to take advantage of evolving ordering habits.
  • Technological investments and the ongoing rollout of the firm’s loyalty program leverage McDonald’s scale and could positively drive average check and brand affinity.
  • As the low-cost operator in the space, input cost inflation and consumer pressure offer McDonald’s a chance to gain share in key markets.

Company Description: 

McDonald’s is the largest restaurant owner-operator in the world, with 2021 system sales of $112 billion across more than 40,000 stores and 119 countries. McDonald’s pioneered the franchise model, building its impressive footprint through partnerships with independent restaurant franchisees around the world. The firm earns more than 60% of its revenue from franchise royalty fees and lease payments, with the remainder coming from company-operated stores across its three core segments: the United States, internationally operated markets, and international developmental/licensed markets. McDonald’s owned 55% of the real estate and 80% of the buildings in its franchise system as of the end of 2021, offering it substantial leverage in maintaining quality standards and consistency.

(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
Small Cap

United Malt Should Benefit from Improving Barley Crops and Normalizing Beer Demand

Business Strategy & Outlook:   

United Malt is the fourth-largest global malt producer, with operations in four countries and a diverse range of customers. The business has capacity to process about 1.25 million tons of malt annually, or roughly 5% of the global 23 million tons produced. This capacity primarily serves the U.S. and Canada beer market, with additional facilities in Australia (serving domestic brewing and exports to Asia) and the U.K. (selling to Scotch whisky distillers). The primary use for malt is for brewing beer–more than 90% of demand–and softening beer consumption in the developed world has offset rising intake in emerging markets. However, malt demand has risen at a faster clip over the past several years given the contribution from rising craft beer demand. Craft beers use a greater amount of malt given heavier taste profiles and, in the U.S., the use of adjunct grains such as rice and corn in mainstream light beer recipes. This demand is expected to grow further, albeit at a slower pace given the already high number of craft brewers globally. 

The primary raw material cost for malting companies is barley. While any given year’s cost for malting barley will depend heavily on weather conditions in key global growing areas, the expected average cost of barley will track broader inflation, as supply and demand roughly equal in a typical growing year. The malting industry is relatively concentrated. Commercial maltsters–those independent from brewer ownership–control the vast majority of total industry malting capacity, with the top four controlling nearly half of this portion. Brewers make up the bulk of the remaining one quarter of malting capacity, but have also remained rational. Barring a sizable strategic shift, which appears unlikely, brewers are not forecasted to offer substantial competition to the commercial malt industry. United Malt is one of the major commercial maltsters in each of the four countries in which it operates. It ensures a reliable supply of barley, good relationships with key customers, and the ability to pass through costs in periods of higher barley prices.

Financial Strengths:  

United Malt is in good financial health. The capital structure is straightforward, and interest coverage is sound. Cash conversion (the ratio of net operating cash flows less capital expenditure, interest and tax to EBITDA) has averaged close to 90% over the two years to fiscal 2020, reflecting its stable earnings profile in a mature industry. United Malt’s capital requirements are lower than other GrainCorp divisions, and the targeted dividend payout ratio is manageable, supported by its cash flows. United Malt’s capital structure is customary for an agribusiness of its nature. It is funded by debt and equity, with debt mostly associated with the funding of inventory and plant, property and equipment. Cash flow and working capital requirements can be volatile due to swings in crop prices, hence a working capital facility is also in place for on-demand debt drawdowns. Debt facilities total above AUD 700 million, and are renewed regularly to align with the business’ seasonal requirements. As at Sept. 30, 2021, the company had AUD 312 million in net debt, representing a 2.1 multiple to EBITDA. United Malt aims to maintain a net debt/EBITDA ratio of 2.0 to 2.5 times–unchanged since its original acquisition by GrainCorp in 2009–but the business’ seasonality and associated working capital requirements mean this target may occasionally be exceeded. United Malt has good coverage over its debt. The forecasted net interest cover (EBIT/net interest expense) to improve to about 9 by fiscal 2024 from the COVID-19-affected 3 in fiscal 2022. 

Bulls Say: 

  • Underlying earnings are stable, supported by long- term client contracts and its ability to pass through costs during periods of high barley prices.
  • United Malt benefits from rising craft beer production globally, which requires greater malt volumes and attracts higher prices.
  • Opportunities exist for further penetration into relatively underdeveloped beer markets, such as Asia and Latin America.

Company Description: 

United Malt processes grains into malt, primarily for brewing into beer. The company is the fourth largest global malt processor and works with some of the world’s largest breweries and distillers as well as fast growing craft producers. The business has capacity to process about 1.25 million metric tons of malt annually, primarily housed in the U.S. and Canada, serving the North American beer market, with additional facilities in Australia (serving both domestic brewing and exports to Asia) and the U.K. (selling to Scotch whisky distillers).

(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

Spotify Reports Strong Q2 User Growth; Likely to Continue in Q3; FVE $187; Shares are Attractive

Business Strategy & Outlook

Swedish-based Spotify is the world’s leading music streaming service provider. The fast-growing digital streaming space has become the primary distribution platform of choice within the ever-changing music industry. Spotify can benefit from various network effects that will help the firm increase its users and amass valuable intangible assets associated with user data and listening preferences. However, it faces intense competition and has a (mostly) variable cost structure that may limit Spotify’s future operating leverage and profitability. Thus, one does not have sufficient confidence that it will generate excess returns on capital over the next 10 years. Spotify may be at the mercy of the record labels in the music industry, as it will need access to content to continue attracting more listeners. While the distribution side of the industry (Spotify, YouTube, Apple, terrestrial and digital radio, and so on) is fragmented, over 80% of licensing is controlled by the big three major record labels: Universal Music Group, Sony, and Warner Music Group. 

As these licensors gather royalties from Spotify and its peers, they maintain pricing leverage as content remains king. The firm’s entry into the podcast space. However, while the firm has become the market leader via content acquisition, which further diversifies its revenue, one does not expect its dependency on labels to be lessened much. Spotify is ahead of the pack in the growing music streaming and podcast markets, but it faces stiff competition from behemoths such as Amazon, Apple, and Google. Unlike Spotify, these firms don’t rely solely on streaming music or podcasts to drive profitability and can potentially run at break-even, or even as loss leaders, while monetizing users via other products and services. It might also be harder for Spotify to steal share from these competitors over time, as Apple Music and Apple Podcasts listeners are probably entrenched with other Apple products, Amazon Music with Echo, and so on. Thus, they might be relatively more loyal to these music and podcast platforms than the users an operating-system-agnostic platform like Spotify can capture.

Financial Strengths

As of the end of 2020, Spotify did not hold any debt on its balance sheet. Spotify’s cash balance at the end of 2020 was $1.7 billion. Spotify has continued to generate cash from operations since 2016; although the firm has incurred hefty operating losses in recent years, cash flow has been better as a good portion of these costs, which are accrued fees to rights holders, have not yet been paid out in cash. While Spotify remains an asset-light business since it uses Google’s cloud platform for data storage and computing, one does expect the firm’s annual capital expenditure to be EUR 75 million-EUR 100 million, likely necessary to provide additional services and tools on the creation side especially for new, up-and-coming, or independent artists. The firm is also likely to take the M&A route with similar objectives, as displayed by its various podcast acquisitions. The free cash flow to equity/sales, to average around 6% the next 5 years.

Bulls Say

  • Spotify’s listener growth may help it negotiate much better terms with record labels over time. 
  • By investing in more services and tools for artists, Spotify may attract artists away from record labels and toward independent distribution, which may allow the company to pay lower royalties over time. 
  • Revenue growth during the next 10 years should accelerate as Spotify keeps investing in different content such as podcasts and video, attracting more users and advertisers.

Company Description

Spotify, headquartered in Stockholm, Sweden, is one of the world’s largest music streaming service providers, with over 150 million total listeners. The firm monetizes its users through both a paid subscription model, referred to as its premium service, and an ad-based model, referred to as its ad-supported service. Revenue from premium and ad-supported services represented 90% and 10% of Spotify’s 2017 total revenue, respectively.

(Source: Morningstar)

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

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

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

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

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

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

U.S. Baby Formula Crisis is a one-time boon for narrow-moat Reckitt; Shares Fairly Valued

Business Strategy & Outlook

Reckitt’s portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene, which should translate into growth ahead of its peer group in the midterm. The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition–a segment with pricing power and generally sound margins. However, the timing of the transaction, ahead of a period of declining birth rates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain. While the segment’s reduced size presents an opportunity for management to refocus on faster-growing businesses–positioning them for longer-term success past the peaks in demand generated by the coronavirus pandemic–further secular declines in birth rates in the U.S. could continue to be a drag to the company’s mid-single-digit growth ambitions. Nonetheless, the worst is behind the company. 

Reckitt’s pricing muscle will also be its strongest test in the current highly inflationary environment. One is cautious about price decisions that are too aggressive and could impact the consumption of some of its products, but believe the company is well positioned to deliver superior price/mix through its portfolio of strong brands and its advantaged category mix. Further supporting top-line growth, the productivity program started in 2020 that now stands at GBP 2 billion over four years has enabled management to reinvest around GBP 1 billion so far in key areas such as research and development, or R&D, and e-commerce. These investments were necessary as Reckitt was at risk of falling behind peers in its customer acquisition investments. One doesn’t see large portfolio restructuring as part of its strategy in the near term. The Reckitt to continue to make marginal portfolio adjustments, acquiring fast-growing brands that complement its existing portfolio, especially in the consumer health sector.

Financial Strengths

Prior to the Mead Johnson acquisition in 2017, Reckitt had a strong balance sheet with debt/EBITDA of around 1 time. It significantly increased its leverage to finance the $18 billion Mead Johnson acquisition, which lead to a peak net debt/EBITDA of 6 times in 2017. Since then, it has been diligent in reducing its leverage and closed 2021 with net debt/EBITDA of 2.6 times, a slight increase compared with the 2020 level of 2.4 times, but closer in line with its peer group. From a cash perspective, this level of debt is manageable for the company given EBITDA covered interest expense about 12 times in 2021. In future, to see continued debt reduction, which should enable Reckitt to start increasing dividends again or pursue slightly larger bolt-on acquisitions in the medium term. Dividends have amounted to GBP 1.2 billion per year for the last three years and one doesn’t expect to see meaningful growth in the near term as Reckitt is targeting a dividend cover closer to 2 times before reinitiating dividend increases.

Bulls Say

  • Reckitt’s portfolio is well positioned in categories with long-term structural growth potential, and the turnaround initiated by new management in 2020 is progressing well. 
  • The disposal of the infant nutrition business in China will free up management’s focus and enable Reckitt to refocus its efforts on its faster-growing segments. 
  • The additional investment in the business financed by the GBP 2 billion productivity program should translate into accelerated growth through penetration gains and increased e-commerce contributions to net revenue.

Company Description

Reckitt Benckiser was formed in 1999 through the merger of the British firm Reckitt & Colman and Dutch-based Benckiser. Recently rebranded under the corporate name Reckitt, it sells a portfolio that includes a variety of household and consumer health brands, such as Lysol, Finish, Durex, and Mucinex, many of which hold the number-one or -two positions in their categories globally. Reckitt has repositioned its portfolio and has entered the infant formula market through the acquisition of Mead Johnson in 2017, expanded its consumer health presence by acquiring Schiff Nutrition, K-Y, and Biofreeze, and has exited the food industry. The firm operates in 60 countries and sells products in more than 200, generating around 35% of sales from emerging markets.

(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

Airbus Posts Solid Second Quarter as It Prepares to Significantly Ramp Production

Business Strategy & Outlook

Airbus primarily generates revenue through manufacturing commercial aircraft. It benefits immensely from being in a duopoly with Boeing in the commercial aircraft manufacturing business for aircraft 130 seats and up; the companies act as a funnel through which all commercial aircraft demand must flow. This allows both companies to actively manage their order backlogs to reduce cyclicality, despite the intense cyclicality of the customer base. Airbus’ commercial aircraft segment can broadly be split into two parts: nimble narrow-bodied planes that are ideal for efficiently running high-frequency short-haul routes, and wide-bodied behemoths that are generally reserved for transcontinental flights. Recently, narrow-body volume has increased substantially due to the global rise of low-cost carriers and improved technology that allows smaller airplanes to operate flight paths that were previously unprofitable.

 Domestic flights have recovered from the pandemic much more quickly than international flights as well, so airlines are more comfortable ordering small aircraft rather than large. Critically, Airbus does not have much competition in the high end of the narrow-body market. This aircraft will enable fleet growth and may replace many aging midsize aircraft. On the wide-body side of the market, there’s a much slower growth, as expected improving technology will allow airlines to substitute narrow bodies for wide bodies for an increasing number of routes. Airbus has a competitive wide-body offering, the A350, though backlogs suggest that Boeing’s comparable 777, 777X, and 787 offerings resonate more with customers. Airbus also has segments dedicated to the production of defense-specific products and helicopter manufacturing. These businesses are less material to Airbus as a whole, generating slightly over 10% of midcycle EBIT. The modest growth from these segments, largely assuming that defense spending as a proportion of gross domestic product remains constant in the European Union and that helicopter deliveries rebound over the medium term.

Financial Strengths

The Airbus is well capitalized. The company ended the year with significant liquidity and is producing positive cash flow despite the distressed market. Vaccinations have encouraged domestic travel resumption in the developed world. Morningstar anticipates that the COVID-19 vaccine will be broadly distributed in the emerging world by 2022, which will allow a robust rebound in commercial air traffic. One does not think liquidity is a concern for Airbus, as the operating environment will improve markedly in the coming quarters and the company is already generating free cash flow. The company ended 2021 in a net cash position. Forward EBITDA covers forward interest expense many times, suggesting that interest obligations are easily covered. Airbus has a sizable pension obligation, but this will be manageable. The Airbus could access the capital markets, if necessary, given it has produced free cash flow during a travel shock. In March 2020, Airbus secured access to a EUR 15 billion line of credit, which supports this thesis. Given Airbus’ massive backlog, proven relationships with customers, and minimal debt burden, one doesn’t think there is a material possibility of financial distress over the forecast period. In March 2020, Airbus suspended its dividend to conserve liquidity as the coronavirus crisis shook the aviation industry. Airbus proposed a dividend during the fourth-quarter 2021 earnings review to be paid out in 2022, and it will grow its dividend with increased earnings per share.

Bulls Say

  • Airbus’ A320 family continues to have a substantial lead in the valuable narrow-body market, and the A321XLR has the potential to open new long-range routes to low-cost carriers. 
  • Airbus is well positioned to benefit from emerging market growth in revenue passenger kilometers and a robust developed-market replacement cycle. 
  • The commercial airframe manufacturing for aircraft 130 seats and up will remain a duopoly over the foreseeable future. The customers will not have many options other than continuing to rely on incumbents.

Company Description

Airbus is a major aerospace and defense firm. The company designs, develops, and manufactures commercial and military aircraft, as well as space launch vehicles and satellites. The company operates its business through three divisions: commercial, defense and space, and helicopters. Commercial offers a full range of aircraft ranging from the narrow-body (130-200 seats) A320 series to the much larger A350-1000 wide body. The defense and space segment supplies governments with military hardware, including transport aircraft, aerial tankers, and fighter aircraft (Eurofighter). The helicopter division manufactures turbine helicopters for the civil and parapublic markets.

(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

Seagate will try to create new growth opportunities through its module-like Lyve platform, which layers software onto multiple drives

Business Strategy and Outlook 

Seagate is a leading designer and manufacturer of hard disk drives used for data storage in consumer and enterprise applications. Seagate is successfully transitioning its portfolio to focus on mass-capacity drives for cloud providers and enterprises as consumer applications for legacy HDDs switch to faster flash-based solid-state drives. There is a continued demand for mass-capacity drives over the next five years as enterprises look to capture more data and use a multi tier storage approach, implementing both mass-capacity HDDs and smaller enterprise-grade SSDs as complements in data centres. Seagate has consistently driven costs down for its mass-capacity HDDs by advancing to larger capacities, and it will continue to do so by leveraging new technologies like heat-assisted magnetic recording. Mass-capacity HDD demand is to offset declines in consumer HDDs over the next five years, but Seagate’s drives doesn’t allow it to establish an economic moat. The HDDs are commodity like even at the enterprise level, with Seagate and Western Digital matching each other’s technological roadmaps and competing with one another for volume, preventing both from earning pricing power. In periods of tight supply and favourable pricing, the firm can earn excess returns on invested capital, but when the market hits oversupply, pricing falls, bringing Seagate’s economic profits with it.

Seagate will focus on expanding to new capacities for its enterprise drives while implementing new technologies like heat-assisted magnetic recording that will help it drive costs down and expand margins. Still, technological advancements like these will be matched by rivals and won’t shield Seagate from cyclical market downturns. Longer term, there will be demand for mass-capacity drives to slow as the cost gap with enterprise SSDs narrows further. Seagate will try to create new growth opportunities through its module-like Lyve platform, which layers software onto multiple drives, but isn’t large enough to offset a secular decline in HDD sales.

Financial Strength

Seagate to focus on generating free cash flow to finance its obligations and send capital back to shareholders. As of the end of fiscal 2022, Seagate carried $5.6 billion in gross debt and $600 million in cash. The firm is to fulfil its obligations with its free cash flow, an average of $1.6 billion in free cash flow annually through fiscal 2027, and Seagate has less than $600 million in principal due annually over the same period. If Seagate were to run into a liquidity or cash flow crunch, it has $1.5 billion available under its revolving credit facility. After paying its obligations, Seagate will focus on sending the remainder of its cash flow back to shareholders in the form of its consistent dividend and repurchase program. Seagate aims to increase its dividend by 3% annually and send 70% of free cash flow back to shareholders, inclusive of its dividend and repurchases.

Bulls Say’s

  • There is strong demand for Seagate’s nearline drives which will power mid-single-digit top-line growth in the short term as enterprises look to store the growing amount of data they generate. 
  • Advancements to larger capacities and new technologies like HAMR to modestly expand Seagate’s midcycle gross margin. 
  • Seagate has maintained a trailing 12-month dividend yield above 3% every fiscal year since 2016, making it a leader among the technology coverage.

Company Profile 

Seagate is a leading supplier of hard disk drives for data storage to the enterprise and consumer markets. It forms a practical duopoly in the market with its chief rival, Western Digital; they are both vertically integrated.

(Source: MorningStar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Ageas is lacking clear direction and a proven strategy

Business Strategy and Outlook 

Ageas is lacking clear direction and a proven strategy. Ageas is present in Belgium, U.K., continental Europe, and Asia as well as running its own reinsurance operation. Tack on to that the importance of the business’ asset management, you are essentially left with a business that has six divisions. Insurance is a complex set of products and the historical approach has been one of diversification. However, it can be seen within primary insurers and in particular multilines, with increasing diversification these businesses can lack specific expertise and master none. This approach to diversification is highly important in the reinsurance business. With exposure to large and lumpy losses these businesses will want to ensure that during those times they have more steady and reliable sources of income. But for primary insurers much of this tail risk is indemnified and this leaves managerial attention a crucial input for shareholder outcomes. It can be found within this and in particular in smaller multilines, is this diversification leads to a dilution of expertise and thus reduces firms’ dominance in their chosen fields.

This strategy of greater diversification unwinds. For example, Prudential has been separated into three distinct geographical businesses that focus purely on life insurance products that are most relevant in each of these locales. Given the strength of the management team and dominance of the respective primary product in each of these regions, in the long term this strategy will not be one that prevails. Aegon is a company that has long-lost the investment community on its strategic direction and rationale. This business is now focusing on just three markets and has also started to trim its portfolio to one that focusses on the accumulation side. Aviva is another business that suffered from the diversification cloud. However, it is now only focusing on three end-markets with force; this has been well received via shareholder distributions. Ageas is to take a similar stand.

Financial Strength

Ageas has quite a high amount of debt on its balance sheet relative to the amount of capital that shareholders own. While the interest Ageas pays on this debt is quite low, the fluctuation of the value in the RNPI and the high value of associates means the quality of Ageas’ balance sheet isn’t high. Furthermore, cash seems to be a little low and Ageas management have discussed either a buyback or eyeing more mergers and acquisitions. Buybacks unless the business is looking to buy into more of its existing partnerships within its Asian operations. Ageas runs its own reinsurance division is not likeable. This is only for its nonlife sales and the rationale provided by management is this diversification frees up capital for investment and distributions to shareholders. Ageas doesn’t have deep expertise here, and while the lines in nonlife that it underwrites are standard, it would be much more sensible to leave this to the experts and focus on what it knows. This would provide more comfort in anticipation of an extreme event, so that Ageas’ balance sheet was fully equipped to handle it. The majority of Ageas’ financial investments are held in government debt. However, there is around EUR 4.1 billion in available for-sale unrealised gains. Then there are the nearly EUR 13.4 billion in loans, a little over EUR 10.8 billion is unsecured. It doesn’t appear to be a particularly tidy, secure or strong balance sheet.

Bulls Say’s

  • It can be sensed that operationally this is not such a bad business. However, with the scant disclosures on operations there’s a little way of knowing. 
  • In Asia Ageas seems to go from strength to strength. Now it is investing more here though, it is hesitant on Chinese reinsurance allocation. 
  • By and large a decent looking fixed-income portfolio. However, it is less keen on the level of unsecured loans.

Company Profile 

Ageas is a life and nonlife insurance company that derives most of its income from life and savings, mostly from Belgium and is headquartered in Brussels. Ageas is essentially the result of the failed bid for ABN Amro by Banco Santander; Fortis; Royal Bank of Scotland. The capital requirements placed on these banks as a result of the acquisition combined with severe write-downs on its collateralised debt obligations in the case of Fortis left the business requiring capital. Understandably, a less successful capital raising that took place the GLOBAL financial crisis wasn’t enough and the bank, Fortis, had to be sold and nationalised. What remained was Fortis Insurance, which in 2010 was renamed to Ageas.

 (Source: MorningStar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Intellia Therapeutics’ Gene Editing Technology looks promising; FVE $85, shares undervalued

Business Strategy & Outlook

Intellia Therapeutics is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. Intellia’s technology platform specializes in Clustered Regularly Interspaced Short Palindromic Repeats (CRISPR)/Cas9, which precisely cuts DNA to disrupt, delete, correct, and insert genes to treat genetically defined diseases. CRISPR/Cas9 has created a new class of medicines, which are well suited for targeting rare diseases or other disorders that are caused by genetic mutations. CRISPR/Cas9 works by having CRISPR (pieces of DNA sequences) guide Cas9 (an enzyme that can cut and edit DNA) to edit, alter, or repair genes. Intellia is utilizing this gene knockout approach to remove unwanted proteins using its proprietary lipid nanoparticle delivery system. Intellia has leveraged its expertise in CRISPR/Cas9 gene editing to advance a pipeline of in vivo and ex vivo therapies for diseases with high unmet medical needs. The company’s proprietary technology has the potential to build blockbusters in rare diseases with limited treatment options available.

 Intellia currently has no approved drugs and a largely early-stage pipeline, so refrain from awarding the company an economic moat. Intellia’s most advanced in vivo candidates are NTLA-2001 for the treatment of transthyretin amyloidosis (ATTR) and NTLA-2002 for the treatment of hereditary angioedema (HAE). NTLA-2001 is part of a co-development and co-promotion agreement with narrow-moat Regeneron, in which Intellia is the clinical and commercial lead party and Regeneron is the participating party. Regeneron shares in 25% of worldwide development costs and commercial profits for the ATTR program. The Intellia will retain 75% of economic profits of NTLA-2001, if approved, and the company also has the expertise and financial support of Regeneron to offset some of the development costs. In addition, the NTLA-2002 is wholly owned by Intellia. The rest of Intellia’s pipeline is either in early (Phase 1) or pre-clinical stages of development. While Intellia does not currently have approved products, the company provides long-term investors with pure play exposure to gene editing.

Financial Strengths

Intellia Therapeutics is in fair financial health. The company has no approved products, so its revenue currently comes from collaboration payments. At the end of 2021, Intellia had just over $1 billion in cash, cash equivalents, and marketable securities, which is a healthy amount to support additional investments in the company’s pipeline. As an early-stage biotechnology company, Intellia has so far only operated at a net loss. The company will not achieve positive net income until 2026 due to its early-stage pipeline and the lengthy development and regulatory approval process.

Bulls Say

  • Intellia’s partnerships allow it to receive milestones and economic benefits from drug candidate progression while offsetting some of the clinical development costs. 
  • Intellia’s CRISPR/Cas9 platform has the potential to develop highly efficacious and curative treatments for rare, genetic diseases with high unmet needs, which will likely lead to pricing power if approved. 
  • The company’s pipeline as possessing strengthening intangible assets and assign it a positive moat trend.

Company Description

Intellia Therapeutics is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. CRISPR/Cas9 stands for Clustered Regularly Interspaced Short Palindromic Repeats (CRISPR)/CRISPR-associated protein 9 (Cas9), which is a revolutionary technology for precisely altering specific sequences of genomic DNA. Intellia is focused on using this technology to treat genetically defined diseases. It’s evaluating multiple gene editing approaches using in vivo and ex vivo therapies to address diseases with high unmet medical needs, including ATTR amyloidosis, hereditary angioedema, sickle cell disease, and immuno-oncology. Intellia has formed collaborations with several companies to advance its pipeline, including narrow-moat Regeneron and wide-moat Novartis.

(Source: Morningstar)

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