Tag: Recommendations

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Technology Stocks

Despite Challenges, a Narrow Moat Still Surrounds Illumina in Sequencing and Grail Remains Promising

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Business Strategy & Outlook:   

Illumina aims to transform human health practices through its leadership of genomic sequencing and related applications. The firm provides a broad range of instruments and related consumables to help researchers and clinicians identify and understand genetic variations. The scale of these projects can be wide, such as population genomic initiatives being pursued in many countries, or narrow, such as noninvasive prenatal screening. Illumina will continue to benefit from the rapidly expanding applications of genomic sequencing tools through its own innovation and select acquisitions. Over the past decade or so, technological advancements in the sequencing industry have largely been led by Illumina and brought down the cost of assembling one genome from nearly $3 billion in the 13-year Human Genome Project completed in 2003 to $1,000 after Illumina introduced HiSeq X in early 2014. 

Further innovation, like the NovaSeq, continue to push down these costs, and Illumina expects its new Chemistry X, to eventually enable the $100 genome, which could greatly increase the accessibility of genomic sequencing. At a lower cost, genome sequencing could have wide appeal in clinical applications beyond current strongholds in oncology and reproductive health. Threats from disruptive technologies may never fully disappear, though. For example, new or cheaper sequencing tools may eventually displace Illumina’s stronghold in genomic sequencing. Overall, emerging systems shall dethrone Illumina’s sequencing technologies, especially given the switching costs associated with its large installed system base and its own development initiatives. Additionally, the company’s recent bet on Grail’s liquid biopsy technology exposes the company to a new risk of disruptive technologies in the very large but nascent preventative care testing market for cancer. So while Grail’s technology looks like it will have a first-mover advantage and should have a decent runway to expand before competitive forces materially alter that target market, future entrants may eat into its liquid biopsy potential, eventually.

Financial Strengths:  

Illumina’s financial flexibility has declined a bit to purchase Grail. Of the $10 billion cumulative purchase price, the company issued about $5 billion of equity, and cash for the remainder, including $1 billion in recently issued debt ($500 million due in 2023 and $500 million due in 2031). Illumina should be able to handle this mild increase in financial leverage. At the end of March 2022, the company held about $1.4 billion of cash and investments and owed $1.7 billion in debt, which the company should be able to easily manage. Additionally, a Delaware jury recently awarded BGI’s Complete Genomics $334 million in past damages related to a patent dispute. While Illumina plans to appeal that decision, the company should be able to easily manage that potential outflow and potential royalty streams, along with a potential fine from the EU antitrust regulator for jumping the gun on the Grail transaction. 

Bulls Say: 

  • Genome sequencing remains a relatively early-stage market, and expanding sequencing indications, including the nascent liquid biopsy applications, create large growth opportunities for Illumina’s legacy and recently acquired operations.
  • Illumina’s very large and growing installed base of sequencing instruments should translate into significant ongoing sales of high-margin consumables and maintenance services.
  • The Grail assets hold substantial promise, so even if antitrust regulators force Illumina to unwind the transaction, it should get a decent return on its investment.

Company Description: 

Illumina provides tools and services to analyze genetic material with life science and clinical lab applications. The company generates over 90% of its revenue from sequencing instruments, consumables, and services. Illumina’s high-throughput technology enables whole genome sequencing in humans and other large organisms. Its lower throughput tools enable applications that require smaller data outputs, such as viral and cancer tumor screening. Illumina also sells microarrays (less than 10% of sales) that enable lower-cost, focused genetic screening with primarily consumer and agricultural applications.

(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

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, 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. While the company does not expect credit costs to normalize over time, low charge-offs and a surge in deposits have allowed Itaú to expand its loan book significantly from its pre-pandemic size. 

Itaú Unibanco appears to be positioning itself as a regional money center in Latin America, with operations across Chile, Uruguay, Paraguay, Colombia, Panama, 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 a unique 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 is  expected 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

Ring the Alarm, RingCentral Poised for Success as UCaaS Becomes the Business Communication Standard

Business Strategy & Outlook:   

RingCentral is a leading unified communication as a service, or UCaaS, provider that enables omnichannel business communication and collaboration on a single cloud-native platform, creating a holistic user experience. As an increasingly mobile workforce requires greater flexibility in business communications, the company believes the firm’s offerings become more critical, and narrow-moat RingCentral should exhibit healthy long-term growth. The company believes the market opportunity for UCaaS providers is significant as 450 million-plus on-premises private branch exchange, or PBX, seats migrate to the cloud. At this point, although cloud penetration of hosted PBX seats is accelerating, less than 5% of seats have moved to the cloud. In a go-to-market model that focuses on leveraging channel partners such as Avaya and Mitel, RingCentral has gained first access to an on-premises PBX install base of over 210 million of these seats. These partnerships provide RingCentral a powerful advantage over competitors in winning a significant portion of the legacy install base. Company foresees healthy long-term growth as the firm increases seat penetration, expands enterprise adoption, and develops its international presence. 

RingCentral’s core product, RingCentral Office, deploys a global unified communications platform that integrates messaging, video, phone, and other cloud-based communication solutions. Users are assigned a single business phone number and profile that allows for connection to the business network from any device and location. Company viewed the platform’s 5,000-plus integration offerings as being particularly important in defining the value and competitiveness of the Office product. RingCentral’s moat is supported by strong user metrics, with a subscription model and net dollar retention rates in excess of 100%. They expect enterprise penetration, which has been the fastest growing business segment, to expand further in coming years, and benefit both deal size and retention. This should lead to lower churn and higher seat penetration, further cementing RingCentral’s position as a leader in the UCaaS space.

Financial Strengths:  

RingCentral’s financial position is reasonably sound but skews toward risky. As of December 2021, RingCentral has $267 million in cash and cash equivalents versus $1.4 billion in debt. In March 2020 and September 2020, RingCentral issued $1.0 billion of convertible senior notes, due 2025 and convertible at $360 per share, and $650 million of convertible senior notes, due 2026 and convertible at $424 per share, respectively. RingCentral has yet to achieve GAAP profitability, as it remains focused on reinvesting excess returns back into the company. RingCentral does not pay a dividend and has only repurchased stock sporadically. In December 2021, the company announced a $100 million share repurchase authorization, which is expected to occur opportunistically. The firm has historically demonstrated descent cash flows, with free cash flow margins averaging 5% over the last five years, including a downward skew from 2020 where free cash flow was pressured as a result of the COVID-19 pandemic. 2021 has shown a rebound to strong free cash flows, and the company expects healthy free cash flow expansion in the coming years. RingCentral has delivered positive non-GAAP operating margins in each year since 2016, which is expected to continue over the next five years, as well. The firm’s non-GAAP operating margin has averaged 10% over the last three years. Over the next 10 years,  margins expand significantly as the company scales, which should translate to GAAP profitability as well.

Bulls Say: 

  • Partnerships with legacy PBX vendors give RingCentral access to a significant portion of the 450 million on-premises users, providing a powerful advantage over competitors in winning a large portion of the legacy installed base. 
  • RingCentral is the first in its space to offer a CCaaS solution in addition to UCaaS, an offering to prove influential in winning enterprise deals again. 
  • As an increasingly mobile workforce requires greater flexibility in business communications, RingCentral should face robust demand and have success in expanding enterprise adoption.

Company Description:  

RingCentral is a unified communication as a service, or UCaaS, provider. RingCentral’s unified communications platform replaces on-premises private branch exchange (PBX) phone systems, which support voice-only desktop phones, with its cloud phone system. Beyond its flagship voice product, the company’s platform enables cloud-based integrated omnichannel communications, including voice, messaging, SMS, video meetings, conferencing, and contact center software solutions, among others. The software allows businesses to communicate and collaborate all on one platform across various device-types.

 (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
Commodities Trading Ideas & Charts

Targa’s longer-term growth picture over the next few years will be its Permian G&P position.

Business Strategy & Outlook

Targa Resources is primarily a gatherer and processor, or G&P, of natural gas with an attractive position in the Permian Basin and other key U.S. shale plays. The firm weathered a very difficult 2020 via sharply reduced capital spending, a nearly 90% dividend reduction, and expense cuts. With a more stable 2021, it reduced debt by $1 billion that year, which was a good move. With leverage now at reasonable levels, returning the dividend to $1.40 a share from $0.40 per share annually makes sense. Targa’s longer-term growth picture over the next few years will be its Permian G&P position (where it added substantial assets with Lucid), liquefied petroleum gas exports, and the ramp-up of the Grand Prix natural gas liquids pipeline. The long-term concerns about the G&P business, because the high level of competitive intensity within the Permian will keep returns extremely low. 

Targa is by no means particularly conservative on capital spending plans–its initial 2021 growth spending plans were twice to original expectations, as the rest of the midstream space hunkered down. While one has long expressed concerns about the leverage impact of the repurchase of the Stonepeak joint venture assets, Targa bought back the assets for $925 million, and then immediately sold off the Grand Coast Express stake for $857 million, essentially making the deal leverage neutral as management expected. Despite concerns about the G&P assets, were optimistic about the future of LPG exports and Grand Prix. LPG exports are largely under contract and sent mainly to Asian and Latin American markets. India remains a potentially attractive option under a government scheme designed to encourage LPG usage. Targa has wisely expanded its export capacity recently, and volumes are at record levels. The Grand Prix NGL pipeline will be a highly attractive asset that takes advantage of Targa’s position in the Permian Basin to move over 425,000 barrels per day of NGLs by the estimates in 2022 (expandable to 550,000 b/d) to Mont Belvieu, and links Targa assets at both ends of the pipe, giving it more control over the molecules and ability to earn multiple fees.

Financial Strengths

In 2020, Targa’s financial health was among the weakest in the midstream coverage universe. That has changed in a strong energy market in 2021 and Targa’s own efforts to fix its balance sheet. Targa has repaid $1 billion in debt in 2021, funded with strong earnings and lots of free cash by cutting the dividend and capital spending, and leverage fell to 3.2 times by year-end, a commendable accomplishment for a firm that has historically run well over 4 times leverage. Before the Lucid deal for $3.55 billion, the expected leverage to decline to below 3 times in 2022, but it will end up around 3.5 times. After many years of operating as non-investment grade, Targa finally earned investment-grade ratings in 2022. Still, Targa’s exposure to weaker customers is greater than peers’, as it disclosed that less than half of its revenue by the estimates is from investment-grade or letter of credit-backed customers. Peers tend to be around 75%-85% investment-grade or letter of credit-backed. Targa has boosted the dividend to $1.40 per share annually in November 2021, up from the $0.40 annually it paid out since March 2020. Previously, the payout was $3.64 annually. Share buybacks seem less likely after the Lucid deal, as Targa will not have any excess cash flow in 2022.

Bulls Say

  • Targa is leveraged to the high-growth Permian, and its Grand Prix pipeline has been an important growth engine. 
  • Targa has reduced debt by $1 billion in 2021, which is a good accomplishment for what has historically been a highly leveraged firm. 
  • Targa is a significant fractionation player at the attractive Mont Belvieu hub.

Company Description

Swatch Group’s biggest brands are Omega (number-two Swiss watch brand by sales after Rolex), Longines (the largest premium watch brand and number four by sales globally), Breguet, Tissot (the leader in mid range Swiss watches), and Swatch. Swatch group employs over 31,000 people, half of them in Switzerland. The Swatch Group makes about 28% of its sales from Omega, 18% from ultra luxury brands, 20% from Longines, 12% from Tissot, and 4% from Swatch. The Omega and Longines to be the group’s most profitable brands.

(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

NIB is incentivised to help bring down industry claims to improve affordability and support participation rates

Business Strategy and Outlook 

NIB Holdings is Australia’s fourth-largest provider of private health insurance. In addition to private health insurance for Australian and New Zealand residents, the firm also provides health insurance for overseas students and temporary overseas workers in Australia, and distributes travel insurance internationally. NIB has consistently grown its share of the market over the last five years. The insurer is expected to continue spending a larger share of expenses on marketing than peers, which lifts profit and adds scale. This further strengthens the group’s future prospects and competitive position. Smaller players with lower margins do not have the financial headroom to engage in marketing (advertising, commissions to brokers, bonus offers) at the same level as NIB, nor can they support white-label offerings. NIB offers white label solutions for Suncorp Group and Qantas. As one of the larger players, NIB is also incentivised to help bring down industry claims to improve affordability and support participation rates. While there are no factors in any material benefit in earnings, NIB seeks to use membership data and industry expertise to prevent illness and personalise treatment.

Despite larger players generating respectable returns on equity on mid-single-digit profit margins, smaller providers have less capacity to absorb the expected claims inflation. This could eventually lead to industry consolidation or at least a pullback in marketing expenses and policyholder acquisition costs. In this scenario, NIB could acquire smaller, less-profitable insurers to grow share, lower costs, and strengthen the competitive position relative to suppliers, or simply retain share while pulling back on marketing and acquisition spend to support margins. NIB made two acquisitions to grow its travel insurance offering, with the rationale to diversify revenue outside of private health insurance, add exposure and scale in an industry expected to experience long-term growth, and leverage its claims management capability and existing distribution channels.

Financial Strength

NIB Holdings is in sound financial health. Cash flow generation from operations is typically strong, and the firm might pay dividends in the upper half of its current 60% to 70% target dividend payout range. As at Dec. 31, 2021, NIB had AUD 234 million in debt and a gearing ratio of 25% (debt/capital), within its long-term target gearing ratio of 30%. Since acquiring World Nomads Group in 2015, NIB has held a similar level of gearing to its target ratio. Given low claims volatility in health insurance, this level of debt is manageable and forecast gearing to remain steady at current levels. Investment assets of AUD 1.1 billion were allocated 39% cash, 40% to fixed income, 17% to equities, and 4% to property and other assets as at Dec. 31, 2021.

 Bulls Say’s

  • Industry growth is tied to a steadily increasing population, ageing demographics and rise in healthcare spending. 
  • The symbiotic relationship of private hospital operators, and buyer power over general practitioners, is a key strength of NIB’s business model. 
  • NIB is a large insurer of international visitors and Australia could become even more popular after handling COVID-19 better than most countries.

Company Profile 

NIB Holdings is Australia’s fourth-largest health fund. It is a national provider of private health insurance, life insurance, travel insurance, and related healthcare services, with a growing presence in New Zealand. Approximately 54% of the population is covered by private health insurance because of taxation benefits, shorter wait times, a choice of doctor and hospital, and cover of ancillary health services.

(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

DaVita stands to benefit from the continued growth in the ESRD population and it is even pursuing integrated care models to gain a bigger piece of the treatment pie

Business Strategy and Outlook 

After selling the DaVita Medical Group in 2019, DaVita focuses almost exclusively on providing services to end-stage renal disease, or ESRD, patients primarily in the United States with an expanding international footprint. Over several decades, DaVita has built the largest network of dialysis clinics in the U.S., and although COVID-19-related mortality concerns look likely to constrain results through 2022, DaVita’s long-term prospects as solid. Once COVID-19 concerns dissipate, it is expected DaVita to get back to more normalized growth trends driven primarily by ESRD trends. The low- to mid-single-digit revenue growth is likely for DaVita in the long run based on the continued expansion of the U.S. dialysis patient population, mild revenue per treatment growth, and ongoing international expansion. These expectations include ongoing expansion of at-home treatments and  DaVita can even benefit from extending the at-home treatment stage for patients, despite its clinic infrastructure. At-home patients still have relationships with clinics and are more likely to continue working and, in turn, remain on more profitable commercial insurance plans for a more substantial part of the 33 months where that is possible before Medicare automatically takes the lead on reimbursement for ESRD treatments.

Eventually, most ESRD patients will need in-clinic therapy, too, unless they receive a kidney transplant. Of note, supply and demand for transplants remain greatly mismatched with the average wait list time around four years. But if those dynamics change, DaVita may even be able to benefit, as it has invested in early-stage initiatives to improve transplants. And in general, DaVita stands to benefit from the continued growth in the ESRD population however they are treated, and it is even pursuing integrated care models to gain a bigger piece of the treatment pie in the long run. With these factors in mind, management has highlighted mid-single-digit operating income and high-single-digit to low-double-digit earnings per share growth targets from 2021 to 2025, which is roughly in line during that period, as well.

Financial Strength

Like many healthcare services providers, DaVita operates with significant leverage, especially when considering lease obligations. After recapitalizing its balance sheet and repurchasing shares following the 2019 sale of DaVita Medical Group, DaVita owed $8.9 billion of debt and held $1.2 billion of cash and short-term investments as of September 2021, or in the middle of its net leverage target range of 3.0 to 3.5 times. Its operating lease obligations of $3.1 billion add another turn, roughly, to leverage. After refinancing many of its obligations, DaVita’s maturity schedule appears easily manageable, though, with big maturities in 2024 ($1.4 billion) and 2026 ($2.6 billion) but limited maturities otherwise. During that time frame, DaVita is to generate at least $1 billion annually of free cash flow, so the company could handle those maturities as they come due through internal means. However, given the firm’s large share repurchase plans, DaVita will seek to refinance its obligations coming due. After $2.4 billion of share repurchases in 2019, the company made another $1.4 billion of share repurchases in 2020 and $0.9 billion of repurchases through September 2021. The company anticipates making significant share repurchases going forward to boost its adjusted EPS growth (8% to 14% goal from 2021 to 2025) above its operating income prospects (3% to 7% goal from 2021 to 2025). It had $1.0 billion remaining on its share repurchase authorization as of September 2021

Bulls Say’s

  • Excluding recent COVID-19-mortality challenges, the ESRD patient population to grow at a healthy rate in the U.S. and around the globe for the long run, which should benefit DaVita. 
  • DaVita enjoys top-tier status in the essential dialysis business, and there are no competitive dynamics to negatively affect that attractive position anytime soon. 
  • While growing at-home care could change its business model a bit, DaVita could also benefit from ESRD patients being able to continue working and staying on commercial insurance plans.

Company Profile 

DaVita is the largest provider of dialysis services in the United States, boasting market share that eclipses 35% when measured by both patients and clinics. The firm operates over 3,100 facilities worldwide, mostly in the U.S., and treats over 240,000 patients globally each year. Government payers dominate U.S. dialysis reimbursement. DaVita receives approximately 69% of U.S. sales at government (primarily Medicare) reimbursement rates, with the remaining 31% coming from commercial insurers. However, while commercial insurers represented only about 10% of the U.S. patients treated, they represent nearly all of the profits generated by DaVita in the U.S. dialysis business.

 (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

Five9 Is a Growing Force in the Cloud Contact Center Space

Business Strategy & Outlook

Five9 provides cloud-native contact center software that enables digital customer service, sales, and marketing engagement. A long growth runway and significant market opportunity is anticipated but no-moat Five9 is expected to require a high degree of investment activity moving forward as it squares off against larger competitors. Five9’s Virtual Contact Center, or VCC, platform combines core telephony functionality, omnichannel engagement capabilities, and various software modules into a unified cloud contact-center-as-a-service, or CCaaS, platform. Five9’s artificial intelligence and automation portfolio supplements and enhances the firm’s core CCaaS offerings, including solutions for digital self-service, agent assist capabilities, and workflow automation. VCC is expected to become increasingly critical for enabling omnichannel interactions amid a secular acceleration of digital-first customer engagement. 

With only 15% to 20% of contact center agents in the cloud, the residual opportunity around uncaptured communication data is significant. The increasing automation of contact center labor also presents an additional opportunity for Five9 and expect the firm’s rapidly growing AI and automation portfolio to enable both scale and efficiency gains for customers’ call center operations. Attach rates for these solutions are rising within each tier of customers, and higher attach rates are observed in incrementally larger enterprises, a positive as the company advances its penetration within larger companies. Reflecting the high utility businesses derive from the firm’s offerings, Five9 reports a net retention rate in excess of 120%, reflecting strong growth within existing customers. Five9’s success in gathering new customers is also noted, principally driven by the migration of contact centers to the cloud. Nonetheless, the current positive outlook is tempered as heightening competition in the cloud contact center space is observed with the emergence of natively built CCaaS offerings from key competitors such as Zoom, Twilio, and Amazon.

Financial Strengths

Five9’s financial position is sound. As of March 2022, Five9 held $478 million in cash and short-term investments versus $738 million in debt. In May 2018, Five9 issued $259 million in 0.125% convertible senior notes, due 2023 and convertible at $40.82 per share. As of March 2022, approximately $2.3 million of the 2023 notes remained outstanding. In June 2020, Five9 issued an additional $748 million in 0.5% convertible senior notes, due 2025, convertible at $134.34 per share, and entirely outstanding as of March 2022. There are no any material concerns about Five9’s ability to repay this debt with existing cash and expected cash generation over the next several years. That said, it is possible the firm may need to access the capital markets, which will not present any significant challenges. Five9 has yet to achieve GAAP profitability, as the company remains focused on reinvesting excess returns back into the company to build out the platform and enhance future growth prospects. Five9 has invested heavily in recent years, building a sophisticated AI and automation portfolio and building direct sales teams to help drive enterprise sales. Five9 does not pay a dividend, nor repurchase stock, and for a growing company within an increasingly competitive market, it is appropriate that the company focuses capital allocation on reinvestments for growth. Healthy growth in free cash flow is anticipated as industry tailwinds around digital transformations lead to long-term growth for Five9. Five9 has generated positive non-GAAP operating margins since 2017. As the company scales, non-GAAP operating margins are expected to reach into the low-20% range within five years, up from 14% in 2021. These positive results should translate to profitability on a GAAP basis by 2025.

Bulls Say

  • Five9 has strong user retention metrics, with net dollar retention above 120%. 
  • As the firm continues to expand its growing AI and automation portfolio, Five9 should benefit as automation of contact center labor will enable a larger incremental market opportunity, and AI-based technology commands a higher ASP per seat. 
  • Five9 has a large residual market opportunity, with only about 15% to 20% of contact center agents having moved to the cloud so far.

Company Description

Five9 provides cloud-native contact center software that enables digital customer service, sales, and marketing engagement. The company’s Virtual Contact Center platform combines core telephony functionality, omnichannel engagement capabilities, and various software modules into a unified cloud contact-center-as-a-service, or CCaaS, platform. Five9’s artificial intelligence and automation portfolio supplements and enhances the firm’s core CCaaS offerings, including solutions for digital self-service, agent assist technology, and workflow automation. Five9 also offers workforce optimization products that optimize call center efficiency through workforce management solutions, manage interaction quality, and track agent performance.

(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

Visa is a Longtime, Established Market Leader that Still Enjoys Strong Growth Prospects

Business Strategy & Outlook:  

Visa is a somewhat unique company in that it is a longtime, established market leader that still enjoys strong growth prospects. Despite the ongoing evolution of the payments industry, a wide moat surrounds the business and that Visa’s position in the global electronic payment infrastructure is essentially unassailable. The shift toward electronic payments has driven Visa’s growth historically, and expected that to continue for the foreseeable future. Digital payments, on a global basis, surpassed cash payments just a few years ago, suggesting this trend still has a lot of room to run. Emerging markets could offer a further spurt of growth even if growth in developed markets slows. 

Visa’s position as the leading network makes it something of a tollbooth business, and the company is relatively agnostic to the smaller shifts within electronic payments, since it earns fees regardless of whether payment is credit, debit, or mobile. Visa is not without its issues in the near term, and its smaller peer, Mastercard, has been performing better over the past few years. Cross-border transactions, which are particularly lucrative for the networks, saw dramatic declines due to the coronavirus outbreak and a reduction in global travel. This headwind to endure for some time, but history suggests travel ultimately makes a full recovery following disruptive events and expect that to be the case again, although the process could take a few years. Visa obviously has sensitivity to the volume of consumer transactions, and the U.S. remains its largest market. A downturn in the economy would slow growth, and the fallout from the coronavirus has had a material impact, with both card networks seeing major declines in transaction volumes, although that pressure has started to reverse. However, there is no forecast of any long-term industry trends that will impede Visa’s ability to maintain its growth in the coming years, and the scalability of the business should still allow the company to modestly expand its already ample margins over time.    

Financial Strengths:  

Visa’s financial condition is solid. Historically, it’s been debt-free, but it issued $16 billion in debt before the Visa Europe acquisition in 2016, and has increased its debt level modestly since. Debt/EBITDA was 1.3 times at the end of fiscal 2021, a level that is viewed as very reasonable. Given the company’s relatively limited appetite for mergers or acquisitions and the asset-light nature of the business, and don’t see a compelling need for a lot of debt financing. Further, given the integral nature of Visa to the global payment infrastructure, don’t believe management would be eager to get too aggressive with its capital structure. On the other hand, an overly conservative balance sheet structure could impede long-term shareholder returns. The current amount of leverage strikes a good balance.

Bulls Say: 

  • Visa has commanding market share in a scalable industry.
  • There is still plenty of runway for growth in electronic payments, which surpassed cash payments on a global basis only a few years ago.
  • The scalable nature of the business should allow Visa to improve its already impressive margins.

Company Description:  

Visa is the largest payment processor in the world. In fiscal 2021, it processed over $10 trillion in purchase transactions. Visa operates in over 200 countries and processes transactions in over 160 currencies. Its systems are capable of processing over 65,000 transactions per second.

(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

Ventia has built trust to deliver highly sensitive and complex projects across its sectors

Business Strategy & Outlook

Ventia is a leading infrastructure maintenance services provider in Australia and New Zealand. Through developing strategic relationships and a focus on safety, Ventia has built trust to deliver highly sensitive and complex projects across its sectors. Revenue has a visible stability with 70%-80% of Ventia’s next 12 months of revenue historically supported by work in hand. Work in hand as at July 2021 stood at AUD 15.5 billion. Approximately 85% of revenue comes from Australia with over 13,000 employees at around 350 sites. The 15% balance comes from New Zealand where over 2,000 workers are employed at approximately 50 sites. Ventia also relies upon an additional workforce of around 20,000 subcontractors. With access to such a large workforce, Ventia can leverage a deep pool of talent across Australia and New Zealand. And the subcontractor base allows for flexible staffing, enabling Ventia to scale the workforce up and down on short notice, and provides wide geographical coverage. This plays into Ventia’s capital-light business model with capital expenditure typically less than 1% of total revenue.

Ventia is structured across four sectors including defense & social infrastructure; infrastructure services; telecommunications; and transport. Its capabilities span the full asset lifecycle including operations and maintenance, facilities management, minor capital works, environmental services, and other solutions. In Australia, Ventia services 50% of the private motorways and tunnels, and over 70% of defence sites. In New Zealand, it provides services to over 90% of the electricity transmission network. Ventia is also the number one telecommunications infrastructure services provider in both Australia and New Zealand. Ventia has long-term relationships with a diverse range of public and private sector clients. In 2020, it did work for more than 60 public sector clients at federal, state, and local levels, and 65 private sector clients ranging from medium-size domestic organizations to large national and global corporates.

Financial Strengths

With net debt excluding lease liabilities of AUD 563 million at December 2021, Ventia is in reasonable financial health. Net debt/(net debt plus equity) is high at 59%, but this skewed by Ventia’s capital-light operating model which limits assets on balance sheet. Debt is comfortably serviced with EBIT/interest expense in fiscal 2021 of 7.0 times. The net debt/EBITDA of around 1.6 in 2021, falling to sub-1.0 levels by 2023, all else equal. Ventia boasts robust operating and free cash flows. On a pro forma basis before interest and tax, three-year average operating cash flow to 2020 was AUD 195 million and three-year average free cash flow was AUD 150 million. As per forecast solid free cash flows in the foreseeable future, growing to over AUD 200 million by 2025, which should comfortably support Ventia’s targeted dividend payout ratio of between 60% and 80% of underlying NPATA.

Bulls Say

  • The maintenance services market is expected to grow strongly, supported by the fair winds of population growth, rising outsourcing rates, and increasingly stringent environmental regulation. 
  • Ventia has long-term relationships with a diverse range of public and private sector clients and has maintained many client relationships for decades across its sectors. 
  • Ventia’s client contracts are relatively long in duration with the average contract term at inception over five years. Most contain some form of embedded price escalation.

Company Description

While Ventia is not the largest player with an estimated 7.5% share of addressable markets, it is a leading infrastructure maintenance services provider in Australia and New Zealand. Its capabilities span the full asset lifecycle including operations and maintenance, facilities management, minor capital works, environmental services, and other solutions. And its business model is favorably capital-light via flexing of a large contractor base complementing a deep pool of talented employees. Ventia has long-term relationships with a diverse range of public and private sector clients with many client relationships maintained for decades. Contracts are favorably long with an average five-year duration at inception and most containing some form of embedded price escalation.

(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

SAP has further entrenched itself in X data with its acquisition of Qualtrics

Stock exchange market concept, stock broker looking at graph working and analyzing with display screen, pointing on the data presented and deal on a exchange, Businessman trading stocks online.

Business Strategy and Outlook 

SAP is a best-in-breed enterprise resource planning provider and holds dominant market share in global ERP software. However, SAP is phasing out its support of its on-premises ERP Central Component software such that by 2030 all of its ERP customers will need to shift to a cloud solution. This vulnerability is a significant threat to SAP’s switching costs, as competitors like Workday offer compelling cloud ERP solutions, while forced migration opens up opportunity to question a company’s best fit for ERP needs. In turn, SAP’s narrow moat, derived from its switching costs, is trending negative. However, it is still early in SAP’s transition of on-premises users to the cloud, which leads to believe its negative trend could be prolonged. ERP is not SAP’s only offering. The company offers software in its so-called intelligent spending category, which includes Ariba and Concur, which cater to procurement and travel and expense reporting. While ERP and intelligent spending software caters to operational data–otherwise known as O data–SAP also provides solutions around X data, or experience data. SAP has further entrenched itself in X data with its acquisition of Qualtrics experience management software. But, regardless of which type of data is flowing through SAP software, this data can be stored in SAP’s database offering, HANA, which is the only database compatible with SAP’s cloud ERP, S/4HANA (unlike on-premises ERP’s former database interoperability).

Despite SAP’s efforts to nurture high attach rates among offerings amid the vulnerable transition to the cloud, such as via database lock-in, this is only ruffling more feathers among its customers that have adapted to the new norm of mix-and-match technology, which the cloud has enabled. Such lock-in attempts are influential in SAP’s consistently declining net promoter score. Moreover, SAP’s efforts to add to its ecosystem in the hopes of more effortless user experience have proved to be anything but accretive, as its acquisition of Qualtrics has shown. SAP announced plans to spin off the company only two years after it was acquired.

Financial Strength

AP has been acquisitive over the last decade as it has built out its ERP offerings. Despite this, SAP has maintained healthy leverage ratios and continues to do so with 2019 net debt/EBITDA close to 2. This figure includes the EUR 7 billion of debt SAP issued in December 2018 to finance the Qualtrics acquisition, leaving it with outstanding long-term debt of roughly EUR 14 billion and EUR 7 billion in cash and marketable securities at the end of the fiscal 2020 third quarter. The Qualtrics acquisition has stretched SAP’s leverage ratio slightly beyond its normal levels over the last decade and may limit the company’s ability to make transformative acquisitions in the near future. It can be foreseen SAP is still having the ability to make tuck-in acquisitions, and with free cash flow of at least EUR 3 billion expected in 2020 and 2021, but SAP is not having any troubles covering its financial obligations.

Bulls Say’s

  • SAP should be able to migrate the majority of its on-premises ERP customers to S/4HANA while continuing to add hefty net new customers to the platform. 
  • As more customers transition to the cloud, SAP should be able to extract significant more lifetime value per customer, adding to its top line. 
  • SAP should see significant margin expansion as a result of improving scale in its cloud offerings.

Company Profile 

Founded in 1972 by former IBM employees, SAP provides database technology and enterprise resource planning software to enterprises around the world. Across more than 180 countries, the company serves 440,000 customers, approximately 80% of which are small to medium-size enterprises.

(Source: MorningStar)

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