Tag: Recommendations

Categories
Dividend Stocks

No-Moat Dick’s Sporting Goods Posted Great Results, but Competitive and Economic Threats Remain

Business Strategy & Outlook

The no-moat Dick’s Sporting Goods lacks an edge as sporting goods are sold through an increasing number of channels. Although its sales have soared during the pandemic, the impact is temporary, as growth in sporting goods retail has generally been minimal due to external competition. According to IBISWorld, sporting goods retail sales experienced average annual growth of just 1.3% in the five years before the pandemic. Dick’s competitors include e-commerce operators (such as wide-moat Amazon), mass retailers (such as wide-moat Walmart), specialty stores (narrow-moat Lululemon, Foot Locker, Bass Pro Shops/Cabela’s), and branded stores and owned e-commerce from major vendors. As an example of the latter, narrow-moat Adidas’ direct-to-consumer business constituted 39% of its 2021 sales, up from 25% in 2015. Further, the COVID-19 crisis has accelerated manufacturers’ direct-to-consumer efforts, as evidenced by Foot Locker’s acknowledgement that wide-moat Nike will reduce shipments to the firm. No one can believe Dick’s market position is strong enough to prevent vendors from offering their merchandise in alternate channels. Its compound average yearly sales growth of 3% over the next decade, at the lower end of projected U.S. activewear growth of 3%-5%. Dick’s recent profitability has greatly improved, but one cannot think the gains can hold. The firm recorded a 16.5% operating margin in 2021, but this as anomalous. In 2013, Dick’s forecast its operating margin would increase to 10.5% by 2017 from 9.0% in 2012, but its actual operating margins were only in the midsingle digits in the years before the pandemic. The 2021 operating margin was the peak level and expect its operating margins will trend downward over time due to a lack of pricing power. Ultimately, one cannot think the firm needs such a large store base (about 860 stores) especially as its e-commerce has risen during the pandemic (21% of sales in 2021, up from 16% in 2019). The Dick’s investments in new full-line and specialty stores have failed to attract enough new customers.

Financial Strengths

The Dick’s is in excellent financial shape. To conserve cash while stores were temporarily closed during the pandemic, Dick’s furloughed employees, cut its planned capital expenditures, reduced salaries, and suspended its share repurchases. In April 2020, it shored up its liquidity further by completing a $575 million convertible bond offering at an interest rate of 3.25% (matures in 2025). Then, in early 2022, the firm issued $1.5 billion in bonds, with half carrying a 3.15% interest rate and maturing in 2032 and the other half carrying a 4.1% interest rate and maturing in 2052. After this offering, Dick’s ended April 2022 with $2.25 billion in cash and equivalents, long-term debt of $1.9 billion, and about $1.6 billion in available borrowing capacity under its revolver. The firm may retire the convertible debt when it becomes callable in 2023. The Dick’s will produce significant free cash flow, which it will return to shareholders as dividends and share repurchases after the crisis has passed. The Dick’s will generate $8 billion in free cash flow to equity over the next decade and will use this cash to repurchase about $5.5 billion in stock and issue about $2.6 billion in dividends. Dick’s suspended repurchases during the pandemic, but then spent nearly $1.2 billion on repurchases in 2021, its largest amount in any year by far. Unfortunately, the average price paid was $109 per share, which was possibly inefficient at well above fair value estimates and historical price levels. For comparison, due to the large share price increase, Dick’s consumed about $400 million in cash in buybacks in 2019 but repurchased more shares than it did in 2021. The annual capital expenditures will average about $450 million (3.5% of sales) over the next five years as Dick’s opens a few stores per year, invests in e-commerce, and renovates existing locations.

Bulls Say

  • Dick’s is the largest pure sporting goods chain in the U.S. It has a large loyalty program that is integrated with that of Nike. Dicks has a strong business in high school and youth sports. 
  • Dick’s is replacing hunting with women’s activewear and other apparel in some stores. Popular activewear probably has better margin and growth prospects than hunting. 
  • Dick’s has adapted well to a market that has changed during the pandemic. Its digital sales skyrocketed to about $2.6 billion in sales in 2021 (21% of total), up from about $1.4 billion in 2019 (16% of total).

Company Description

Dick’s Sporting Goods retails athletic apparel, footwear, and equipment for sports. Dick’s operates digital platforms, about 730 stores under its namesake brand (including outlet stores), and about 130 specialty stores under the Golf Galaxy, Public Lands, and Field & Stream names. Dick’s carries private-label merchandise and national brands such as Nike, The North Face, Under Armour, Callaway Golf, and TaylorMade. Based in the Pittsburgh area, Dick’s was founded in 1948 by the father of current executive chairman and controlling shareholder Edward Stack.

(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

Corporate Action: Vote in favor of Ardent Leisure’s Proposed Sale of Main Event and Capital Return

Business Strategy & Outlook:   

Ardent Leisure’s fundamentals is moderated by the wider macroeconomic factors that influence its operations and the current restructuring efforts to restore earnings after the recent upheavals. Of greater concern is the near-term impact of the coronavirus on Ardent’s operations and its financial position, especially theme parks. But cost-cutting and government assistance measures have provided relief. RedBird’s USD 80 million investment in June 2020 for an initial 24.2% preferred equity interest in Main Event secures the U.S. family entertainment chain’s funding position. Furthermore, RedBird has the option to acquire an additional 26.8% interest at a future date, with the valuation to be based upon 9.0 times EBITDA at the time of exercising the option, subject to a minimum equity floor price. However, the Australian theme parks remain challenged. While the facilities have emerged from their forced shutdown in March 2020, the lingering impact of the pandemic is likely to constrain free cash flow. 

Beyond the current coronavirus crisis, Ardent Leisure possesses solid leisure and entertainment assets that all operate in intensely competitive markets. These assets compete for the leisure dollars of consumers who are spoilt with alternatives, especially in this online digital world, where most traditional entertainment activities can now be enjoyed in a virtual setting. Furthermore, most of the group’s businesses are relatively capital-intensive, particularly as Main Event expands its venue footprint and as Ardent strives to keep up with competing leisure options and stay fresh in consumers’ minds. The situation is exacerbated by cyclical factors, with consumer discretionary spending highly leveraged to swings in general economic conditions. The agreed sale of Main Event, announced in April 2022, was struck at a good price and the proceeds will lead to a healthy distribution to shareholders. However, it will leave the group with just the loss-making theme parks unit.

Financial Strengths:  

Ardent has AUD 119 million of net debt on the balance sheet, as at the end of December 2021. This comfortable position with AUD 93 million in available liquidity for Main Event is mainly thanks to Redbird’s USD 80 million (AUD 100 million) capital injection into the U.S. business, in return for a 24.2% preferred equity stake. The Queensland government’s recent tourism-friendly three-year AUD 64 million loan package (plus AUD 3 million grant) also means the Australian theme parks unit now has AUD 18 million of available liquidity.

Bulls Say: 

  • Main Event Entertainment adds growth appeal to Ardent Leisure, as it accelerates expansion into the United States family leisure market.
  • All of Ardent Leisure’s operating businesses enjoy solid market positioning.
  • Ardent Leisure’s balance sheet is solid and bolstered by a string of recent asset divestments and refinancing.

Company Description: 

Ardent Leisure is an owner and operator of leisure assets. Its theme park operations are situated in Australia, including Dreamworld and WhiteWater World on the Gold Coast. The group also runs Main Event, a growing portfolio of family entertainment operations in the United States, offering bowling, arcade and various other leisure activities. The agreed sale of Main Event, announced in April 2022, was struck at a good price and the proceeds will lead to a healthy distribution to shareholders. However, it will leave the group with just the loss-making theme parks unit.

(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

Reducing Scotts’ FVE to $130 on Lowered Near-Term Outlook; Shares Remain Undervalued

Business Strategy and Outlook 

Scotts Miracle-Gro is the largest and most recognizable name in the U.S. consumer lawn and gardening market. The firm sells a wide array of products aimed at helping consumers grow and maintain their lawns. The U.S. consumer segment, which consists of lawn and gardening products, generated 65% of total revenue in fiscal 2021. Scotts has generated healthy margins on its products through effective branding, which allows it to maintain favourable product positioning and shelf space in the largest mass-market and home improvement retailers. Scotts has also been able to charge a premium over competitors because of its strong brand equity. While actual product differentiation in the industry is limited, consumers have been willing to pay up for Scotts’ products.

Future demand for gardening products will depend on growth in the housing industry. We expect housing starts to average a little over 1.5 million per year through 2030. While housing starts alone should increase demand for gardening products, we see some secular trends that will offset the growth. Living-preference shifts to smaller lots and urban centers should result in less need for gardening products. Additionally, a greater proportion of gardening products will be sold online. Currently, the vast majority of sales occur at brick-and-mortar retail. Even if Scotts increases its online sales presence, it may lose some pricing power as many products in the gardening industry shift away from brick-and-mortar retailers to online platforms, where Scotts will likely face more low-priced competition. The Hawthorne segment, which includes indoor gardening, hydroponics, and lighting equipment, contributed a little under 30% of revenue in fiscal 2021. Its growth is closely tied to the legalization of cannabis in the U.S., as its products are frequently used by licensed growers. Recent acquisitions in the business should position Scotts to take advantage of growing demand from states where cannabis has been recently legalized. The majority of U.S. consumer sales typically come from Home Depot and Lowe’s. However, this should decline as a percentage of companywide revenue as the Hawthorne segment grows.

Financial Strength

Scotts Miracle-Gro currently has elevated leverage. As of March 31, we calculate net debt/adjusted EBITDA was nearly 5 times, well above with management’s long-term target leverage of 3.5 times. However, the company built up inventory in both the U.S. consumer and Hawthorne businesses in anticipation of improving volumes in the second half of the fiscal year. As the company works down its inventory and uses the cash to repay debt, we see no issues with its current financial position. Further, as the Hawthorne business recovers from the current industry oversupply, we expect EBITDA growth will resume and leverage ratios will fall back to management’s targets. Over the last five years, dividends grew at an average mid-single-digit rate. Management has indicated that it intends to continue raising the dividend, and Scotts should have the free cash flow to do so.

Bulls Say’s

  • U.S. household formation growth will drive demand for gardening products. As the market leader in consumer gardening products, Scotts will benefit from the secular housing trend. 
  • Consumer behaviour has changed as a result of COVID-19, with more consumers engaging in gardening as an activity. As the largest player in the consumer gardening market, Scotts will benefit from this change. 
  • The emerging cannabis industry represents a lucrative opportunity for Scotts, which is well positioned to capture this segment of the market.

Company Profile 

Scotts Miracle-Gro is the largest provider of gardening and lawncare products in the United States. The majority of the company’s sales are to large retailers that include Home Depot, Lowe’s, and Walmart. Scotts Miracle-Gro can sell its products at a higher price point than its competition because of a well-recognized portfolio of brands that include Miracle-Gro, Roundup, Ortho, Tomcat, and Scotts. Scotts is also the leading supplier of cannabis-growing equipment in North America through its Hawthorne 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

Broadcom’s Acquisition of VMware Underscores the Latter’s Importance in Hybrid-Cloud Environment

Business Strategy & Outlook:   

VMware, a pioneer of virtual machines, dominates the maturing data center server virtualization market. With organizations prioritizing cloud over on-premises computing infrastructure, company believes VMware’s robust cloud provider partnerships, including the major hyperscale’s, should help the firm handle the changing market landscape. Company expects VMware’s growth to come from being the glue between computing infrastructures, networking locations, and burgeoning security and developer offerings being bolstered from its strong end user compute portfolio. Our view of cloud networking, akin to VMware’s assessment, is that most enterprises will utilize hybrid cloud solutions. Public clouds can precipitously augment network growth but enterprises face integration complexities among on-premises networks and private and public clouds. Beyond hyperscale cloud provider partnerships, VMware’s Cloud Provider Program offers thousands of cloud partners collaborating with VMware software. In our view, this allows VMware to remain ingrained in networks while becoming the commonality between private and public clouds. Company thinks that the November 2021 spinoff from Dell Technologies put an end to an uncertain future around VMware, and that growth can accelerate through VMware’s integration with cloud vendors and cadence of product releases outside of Dell’s umbrella. With solid free cash flow and growth opportunities, Company assumes that its $11.5 billion special dividend, to all shareholders, as part of the spinoff was worth the price of becoming a stand-alone entity. 

VMware’s vSphere and ESXi hypervisor are virtualization gold standards, and its hybrid cloud platform creates a consolidated view across multicloud environments. The company’s strong franchises within end user compute, security, and virtualized networking and storage can be overlooked, and support growth ventures such as VMware’s integration of Kubernetes-based container management within vSphere. It is expected that       software cohesion across on-premises and clouds along with nascent networking products should give VMware maintainable growth. In May 2022, the firm agreed to be acquired by Broadcom.

Financial Strengths:  

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

Bulls Say: 

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

Company Description:  

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

(Source: Morningstar)

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

Engie is well Positioned to Benefit from the Power Prices Rally

Business Strategy & Outlook:   

Engie is one of the three largest integrated international European utilities, along with Enel and Iberdrola. Under the tenure of previous CEO Isabelle Kocher, the firm sold EUR 16.5 billion of mostly commodity-exposed assets– E&P, LNG, and coal plants–to focus on regulated, renewables, and client-facing businesses. This strategy lowered the weight of activities that typically have volatile cash flows and no economic moats. However, Kocher was blamed for the lack of visibility of the client-facing businesses. After she was ousted by the board in early 2020, the firm shifted its strategy to reduce the weight of these activities and sell stakes in noncore businesses. That drove the sale of Engie’s 32.05% stake in Suez to Veolia at an attractive price and of its multi-technical subsidiary Equans to Bouygues for EUR 7.1 billion. The latter is part of an EUR 11 billion disposal plan by 2023.

Engie will increase annual investments in renewables from 3 GW to 4 GW between 2022 and 2025 and 6 GW beyond. Regulated gas networks, mostly in France, account for around one third of the group’s EBIT. Contracted assets comprise thermal power plants in emerging markets, especially the Middle East and Latin America, with purchased power agreements, or PPAs, securing returns on capital. Remaining merchant exposure is made up of gas plants across Europe, Belgian nuclear plants and French hydropower assets. Gas plants are well positioned as the share of intermittent renewables increase. Nuclear and hydropower provide exposure to European power prices although Belgian nuclear plants will be shut by 2025. Taking that into account, the valuation sensitivity to EUR 1 change in power prices is EUR 0.16 per share, 1% of the fair value estimate. With net debt/EBITDA of 2.4 times, Engie has one of the lowest leverages in the sector. Still, the 2019 dividend of EUR 0.8 was canceled because of pressure from the French government, which has 34% of the voting rights, and the coronavirus impact. Still, the dividend was reinstated in 2020 and the 2021 dividend of EUR 0.85 is above the precut level. A projected 2021-26 dividend CAGR of 5% based on a 69% average payout ratio.

Financial Strengths:  

Net debt/EBITDA will average 2 times through 2026. Economic net debt including pension and nuclear provisions amounted to EUR 38.3 billion at end-2021, implying a leverage ratio of 3.6. The economic net debt to decrease to EUR 37.1 billion through 2026. Thanks to the EBITDA increase, economic net debt/EBITDA will decrease to 3.2 in 2026, averaging 3.1 between 2021 and 2026, comfortably below the company’s upper ceiling of 4. After the COVID-19-driven cancellation of the 2019 dividend of EUR 0.80 per share, Engie paid a EUR 0.53 dividend on its 2020 earnings implying a 75% payout. For 2021 results, the company will pay a dividend of EUR 0.85, implying a 70% payout in line with the 65%-75% guidance range over 2021-23. Between 2022 and 2026, the adjusted payout ratio to get a progressive dividend. All in all, the forecasts point to a 2026 dividend of EUR 1.08 involving a 5% CAGR by then. Ninety-one percent of debt was fixed-rate at the end of 2021. Meanwhile, 83% of the company’s debt was denominated in euros, 11% in U.S. dollars, and the balance in Brazilian real.

Bulls Say: 

  • Engie’s strategic shift announced in July 2020 should be value-accretive as evidenced by the sale of its stake in Suez and of Equans.
  • In the long run, the group could convert its gas assets into hydrogen assets.
  • The group is well positioned to benefit from rising power prices in Europe thanks to its French hydro dams.

Company Description: 

Engie is a global energy firm formed by the 2008 merger of Gaz de France and Suez and the acquisition of International Power in 2012. It changed its name to Engie from GDF Suez in 2015. The company operates Europe’s largest gas pipeline network, including the French system, and a global fleet of power plants with 63 net GW of capacity. Engie also operates a diverse suite of other energy businesses.

(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

Millicom Shares Now Trading Without Subscription Rights; Fair Value Estimate to $34

Business Strategy & Outlook

After several years of restructuring, Millicom is now best thought of as a collection of investments in Latin American telecom businesses. The firm will spend the next couple years primarily operating its businesses rather than reshaping its portfolio, allowing the firm to more clearly demonstrate its ability to generate cash flow. Millicom’s subsidiaries have provided wireless service in Guatemala, El Salvador, Honduras, Bolivia, and Paraguay since the early 1990s, giving it the largest market share in most of these countries. In addition to the wireless business, Millicom has invested heavily, both organically and through M&A, to build cable infrastructure, carving out solid market share in the fixed-line market as well—it is the internet access leader in Guatemala, Panama, Bolivia, Honduras, and Paraguay and the second largest in Colombia and El Salvador. Millicom can offer converged fixed-line and wireless services to nearly 13 million homes and businesses across a footprint that encompasses a population of about 120 million people.

Favorable market structures following recent consolidation should also benefit Millicom. In Guatemala, which is now the firm’s most important market following the buyout of minority investors, it is the clear market leader and competes almost exclusively against America Movil. Other markets with only one substantial competitor include Panama, Honduras, Nicaragua, and Bolivia. Only Colombia, where Millicom is a distant third in the wireless market, presents an especially difficult competitive situation, but the firm has made progress gaining scale recently. Wireless penetration in these markets is already high, but data services still provide significant growth opportunities. Less than 55% of Millicom customers have a 4G LTE smartphone today, but this figure is up from 30% three years ago. Broadband penetration is also low in the countries Millicom serves at around 30%. As demand for high-quality connectivity grows, the Millicom’s financial performance will improve nicely in the coming years.

Financial Strengths

Millicom historically carried below-average leverage, with a net debt around 1.0-2.0 times EBITDA. However, acquisitions and the buyout of minority investors in Guatemala has caused the debt load to swell. Net debt, including lease obligations, stood at $7.8 billion-, or 3.4-times EBITDA, at the end of 2021. The firm expects to complete a $750 million equity rights offering during 2022 to fund a portion of the Guatemala transaction that will bring net leverage down to 3.0 times. Management has had a net leverage target of 2.0 times EBITDA since its portfolio reshuffling began in 2018 but hasn’t come close to that mark yet. Millicom cut its dividend to $1 per share from $2.64 in early 2020 and then eliminated the payout entirely later in the year, saving about $265 million annually. While the 2.0 target remains a long-term goal, management expects leverage to decline to only about 2.5 times EBITDA by the end of 2025, with share repurchases resuming in 2023. By the calculation, this target implies the firm could repurchase $1.5 billion of its shares over the next four years, or about 60% of its current market capitalization. The firm take a more aggressive approach to reducing leverage given the volatility of the markets in which it operates. About 55% of the consolidated debt load and lease obligations sits at the individual operating subsidiaries, with Millicom guaranteeing less than 5% of these obligations. Most subsidiaries carry modest debt loads, most below 2 times net leverage. The businesses in Paraguay and Costa Rico are exceptions, with more than 3 times net leverage. Leverage in Panama is also elevated at 2.7 times EBITDA. At the parent level, Millicom had $3.8 billion in net debt outstanding at the end of 2021. The Guatemalan business subsequently issued $900 million of debt to fund part of the minority investor buyout, freeing up cash to repay parent-company obligations. The Guatemalan operation now carries net leverage of about 1.8 times.

Bulls Say

Millicom holds strong wireless market share across nine Latin American countries with a combined population of nearly 120 million people and owns high quality cable networks that can provide broadband to 13 million homes and businesses in the region.

Broadband penetration remains low across the region and only about half the population owns a 4G smartphone, providing a long runway for growth.

Millicom should be able to improve its margins and cash flow as it grows its converged customer base.

Company Description

Millicom offers wireless and fixed-line telecom services primarily in smaller, less congested markets or in less developed countries in Latin America. Countries served include Bolivia (100% owned), Honduras (67%), Nicaragua (100%), Panama (80%), El Salvador (100%), Guatemala (100% following the buyout of minority partners in 2021), Paraguay (100%), Colombia (50%), and Costa Rica (100%). The firm’s fixed-line networks reach nearly 13 million homes and businesses while its wireless networks cover about 120 million people. Increasingly, Millicom offers a converged package that may include fixed-line phone, broadband, and pay television in conjunction with wireless services. The firm hopes to spin off portions of its tower business and mobile payments operation over the next couple years.

(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

Ongoing shift to online will allow Premier Investments Ltd to push landlords to lower rent

Investment Thesis:

  • Trading below the updated valuation and the risk reward looking more attractive post the recent share price correction.
  • Strong brands in Smiggle and Peter Alexander.
  • Expectations of significant growth of Smiggle and Peter Alexander in UK, Asia and Eurozone. 
  • PMV controls its own brands (design, sourcing and distribution) rather than distributing other brands. 
  • Strong online sales presence, which allows the company to compete with the likes of Amazon and eBay, as these online platforms cannot sell PMV brands. 
  • Significant exposure to the consumer overseas (UK, Europe & Asia), as opposed to be 100% leveraged to Australian sales. 
  • Strong management team, including Chairman Solomon Lew and incoming CEO Richard Murray (ex CEO JB Hi Fi). 
  • Strong balance sheet with net cash position provide buffer in hard time and flexibility in times of growth.

Key Risks:

  • Increase in competitive pressures (reported entry of Amazon into the Australian market). 
  • Increase in cost of doing business. 
  • Loss in brand equity for the key brands – Smiggle and Peter Alexander.
  • Store roll-out strategy stalls or new stores cannibalise existing stores. 
  • The Company unable to arrest the sales decline in its more mature brands. 
  • Adverse currency movements. 


 Key Highlights:

  • Retail sales of $769.9m, up +0.6% YoY or up +5.2% over 1H20, or on a like-for-like basis, global sales were up +8.9%. This was driven by record online sales of $195.4m up +27.3% relative to the pcp or up +101.1% over 1H20, and record Peter Alexander sales of $227.4m, up +11.4% on 1H21 and up +57% on 1H20, whilst Smiggle continues to show positive sales momentum, up +5.6%.
  • Premier Retail Gross Profit of $507.2m was up +1.4% relative to the pcp or up +10.8% over 1H20. Gross Margin were up 54bps on 1H21 and up 334bps on 1H20. Total cost of doing business declined 67bps on 1H21 and by 430bps on 1H20.
  • PMV retains a strong capital position with all operating debt repaid during 1H22 and now has cash on hand of $468.6m at 1H22-end. PMV retains a 26.2% stake in Breville Group (BRG), with investment at a market value of over $1bn at 29 January 2022 (balance sheet value of $289.3m). PMV retains a 19.9% in Myer worth $69m.
  • The Board declared a record interim dividend of 46cps fully franked, up +35.3% on 1H21.
  • In Europe, Smiggle’s sales performance in 1H22 exceeded expectations, particularly around the key “back to school” periods, however, in Asia, numerous Covid related disruptions were experienced in 1H22, including school closures and lack of tourists due to international border closures.
  • The Board declared a 1”.

Company Description:

Premier Investments Ltd (PMV) wholly owns retail conglomerate the Just Group and also holds a 27.5% stake in listed electrical consumer products manufacturer Breville Group Ltd (BRG) and 10.8% stake in listed department store, Myer Holdings (MYR). The Company has the following brands in its portfolio: Smiggle, Portmans, Just Jeans, dotti, Jacqui-E, Jay Jays and Peter Alexander. The Company operates in Asia, Europe, the UK and Australia.

(Source: Banyantree)

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

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

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

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

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

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

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

Categories
Dividend Stocks

CME Stands to Benefit From Rising Interest Rates as Volatility Returns to Its Markets

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

Business Strategy & Outlook

CME has suffered from little to no revenue growth more recently as all its futures complexes reported lower trading volume in 2021 than in 2019, with the notable exception being its equity futures platform, which remains well above prepandemic levels. The most significant headwind for the company has been the impact that low short-term interest rates has had on its interest rate complex, which is its largest source of revenue. When interest rates are expected to stay low there is less need for interest rate hedging and less incentive for speculation, creating a drag on CME’s trading volume. With interest rates now rising, though, this drag has been removed and the company’s results have improved so far in 2022. After a couple years of meager revenue growth, CME enjoying more favorable market conditions in the near term. 

CME has benefited in the past from increased retail interest in equity markets. Equity markets saw a surge in trading volume in 2020, with equity derivative products seeing a larger and more maintained increase. CME’s equity index futures business produced impressive performance as a result. The expected revenue from CME’s equity derivatives to partially normalize over time as retail interest in equity markets fades. That said, the rise of $0 commissions, changes in investor behavior, and the availability of futures on retail brokerage platforms will provide a permanent tailwind to CME’s equity business, so one cannot foresee a full retracement. Additionally, as global commodity markets remain volatile, CME’s energy and agricultural futures to see continued interest. Beyond 2022, CME should see steadier growth in revenue and earnings. CME has a dominant position in many of the contracts that trade in its exchange and is well diversified across multiple product lines. In the long term, the anticipate that the company will continue to benefit from secular growth in the need to hedge commodity, energy, and interest rate exposure. CME also has a history of generating incremental growth through the introduction of new futures contracts, like the micro-E-mini S&P 500 contract and bitcoin futures.

Financial Strengths 

CME Group has a strong balance sheet that would serve as a buffer if a market disruption occurs The balance sheet also provides the company with the flexibility needed to invest more capital into organic investments or acquisitions if it chooses to do so. At the end of 2021, the company had equity of $27 billion against $3.4 billion in debt. The company’s balance sheet is managed conservatively, with a targeted EBITDA to debt ratio of 1 time and a firm goal to keep $700 million in cash on hand at any given time. CME is well above this goal, with more than 2.8 billion on hand at the end of 2021, giving it a rock-solid balance sheet. As a clearinghouse, CME is obligated to cover the losses of its clearinghouse members in the event of a default. However, CME’s share of potential losses as a clearinghouse is capped at $250 million and the company’s balance sheet has more than sufficient liquidity to cover the potential credit risk that comes from the firm’s clearinghouse activities. In recent years, CME has returned most of its operating cash flow in the form of dividend payments. The company does this through a combination of a regular quarterly dividend and a special discretionary distribution it typically makes once per year. The company to maintain its regular dividend for the foreseeable future but note that the size of the special dividend can fluctuate from year to year based on the company’s result for the year and what cash it has on hand. Should the company make another major acquisition, like the purchase of NEX, the discretionary portion of CME’s dividend to shrink or be eliminated outright.

Bulls Say

  • CME has assembled a diverse set of derivative products in interest rates, equities, commodities, metals, and foreign currency. Weakness in one product is often offset by strength in another. 
  • CME has been able drive trading volume growth by successfully introducing new futures contracts, like the micro-E-mini-S&P 500 and Bitcoin futures. 
  • CME stands to be a beneficiary of rising rates as increased volatility drives more trading volume in its interest rate futures contracts.

Company Description

Based in Chicago, CME Group operates exchanges giving investors, suppliers, and businesses the ability to trade futures and derivatives based on interest rates, equity indexes, foreign currencies, energy, metals, and commodities. The CME was founded in 1898 and in 2002 completed its initial public offering. Since then, CME Group has consolidated parts of the industry by merging with crosstown rival, CBOT Holdings in 2007 before acquiring Nymex Holdings in 2008 and NEX in 2018. In addition, the company has a 27% stake in S&P/Dow Jones Indices LLC, making the Chicago Mercantile Exchange the exclusive venue to trade and clear S&P futures contracts. Through CME’s acquisition of NEX in 2018 it has also expanded into cash foreign exchange, fixed income trading, and collateral optimization.

(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

The investment managers segment has performed well, and net inflows in the near term are anticipated

Business Strategy and Outlook

SEI Investments consists of four main segments: private banks, investment advisors, institutional investors, and investment managers. A minority interest in value equity manager LSV Asset Management generates about 20% of its pretax income. The firm’s investment advisors, institutional investors, and investment managers segments have been strong drivers of earnings and have strong operating margins, while private banks has been a thorn in SEI’s side, with disappointing revenue growth and operating margins. 

SEI’s private banks business primarily provides investment-processing outsourcing services for banks and trusts. Beginning in 2005, SEI began developing a new feature-rich platform known as Wealth Platform to replace its 30-year-old Trust 3000. It initially focused on the U.K. market then the U.S., mostly on converting Trust 3000 clients to Wealth Platform. SEI has faced some client losses but also some wins, such as Regions Financial and more recently Canadian Imperial Bank of Commerce’s U.S. business. It is projected for the company to have, low- to mid-single-digit revenue growth and the eventual retirement of SEI’s legacy platform to improve margins over the long term. In addition, as amortization of its platform rolls off, operating margins should improve faster than EBITDA margins. 

The investment advisors segment offers investment management services to registered investment advisors, financial planners, and life insurance agents. SEI has been able to offset lower-fee offerings, such as ETFs, with other products, such as tax-efficient portfolios, but fees have been range-bound. One positive for SEI is that the RIA and broker/dealer channels are generally the faster-growing advisor channels. The institutional investors segment provides outsourcing services for chief investment officers, and it is likely, it will continue to face strong competition. Though outflows due to pension risk transfers may slow, it is alleged pressure on the firm’s endowment client base. The investment managers segment has performed well, and net inflows in the near term are anticipated. LSV continues to be very profitable but has been bleeding assets due to underperformance and value investing falling out favor.

Financial Strength

SEI’s financial health is sound in analysts’ view. As of December 2021, SEI had minimal debt ($40 million on a revolver) and except during the financial crisis, it has had little to no debt over the past 10 years. In addition, SEI has over $800 million in cash. SEI has a long record of increasing its dividend each year, and share repurchases continue to boost EPS growth. SEI’s average diluted share count has decreased at a 3% CAGR from 2016 to 2021. During the financial crisis, SEI weathered the storm reasonably well except for losses from structured investment vehicles related to money market funds. Given the severity of the crisis and the lessons learned, a repeat of these losses is very unlikely, in experts’ opinion. Because of SEI’s historical focus on organic growth, it is likely for SEI to continue to increase its dividend and share repurchases concurrent with free cash flow generation.

Bulls Say’s

  • Margin expansion in SEI’s private banks segment is plausible and could significantly increase the firm’s earnings power. 
  • SEI’s investment advisors segment should benefit from the continued growth of fee-based advisors. 
  • SEI’s client relationships tend to be sticky and last many years because of contract terms and switching costs from process disruption.

Company Profile 

SEI Investments provides investment processing, management, and operations services to financial institutions, asset managers, asset owners, and financial advisors in four material segments: private banks, investment advisors, institutional investors, and investment managers. SEI also has a minority interest in LSV Asset Management, a value equity asset manager with about $99 billion in assets under management. As of Dec. 21, SEI (including LSV) manages, administers, or advises on over $1.3 trillion in assets. 

(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

Marqeta offers impressive growth, but Its reliance on block Is a Concern

Business Strategy & Outlook:   

Marqeta has recently enjoyed rapid revenue and volume growth that has led to improving margins, though the company is still unprofitable. Marqeta’s operating cost structure is mostly fixed, so higher processing volume on debit and credit cards issued on its platform naturally leads to better margins for the firm, creating a road map for profitability as volume grows. The Marqeta card-issuing platform provides its customers with the infrastructure and application programming interfaces, or APIs, needed to build and rapidly deploy innovative card payment systems without preexisting payment expertise. The unique capabilities and flexibility of Marqeta’s platform has allowed it to find success with fintech and technology companies, with buy now pay later firms and Block being the most notable. Marqeta continues to benefit from the high organic growth its customer base provides, and the transition to digital payments as digital card issuance and tokenization are among its strengths, with major firms like Citi and JPMorgan using its digital issuance technology. 

That said, Marqeta has a genuine problem with customer concentration. More than 80% of Marqeta’s revenue comes from its two largest customers, with Block alone accounting for around 65% of net revenue. This creates serious risk for Marqeta as either a loss of this relationship or a material deterioration in contract terms could have serious repercussions on Marqeta’s business model. Marqeta’s current agreement with Block lasts until 2024, giving Marqeta some breathing room, but the firm’s reliance on Block will be an ongoing concern as it is the company’s largest source of risk. In a more positive light, Marqeta has announced deals to create debit cards for Bill.com and Goldman Sachs’ Marcus—major wins for the company. It is also moving forward with plans to expand its international business and move into credit card issuance. While these efforts are still in their early stages, these plans along with its recent contract wins provides Marqeta with a potential road map to continue its rapid growth and address its concentration issues.

Financial Strengths:  

Marqeta is in a very strong financial position, particularly after raising $1.2 billion in its IPO. Marqeta ended March 2022 with over $1.6 billion in cash and investment securities on its balance sheet. With no long-term debt outstanding, this provides the company with ample financial resources to invest back into its business, without the need to raise more capital. Additionally, Marqeta’s business requires little investment capital, even as it grows rapidly. The company is first and foremost a financial technology firm, and requires very little physical assets. Marqeta also collects interchange revenue from merchants before paying its customers their share, meaning the company has low net working capital requirements due to its high accounts payable. In fact, the company generated positive cashflow from operations in 2021 and used less than $50 million in 2022. This places Marqeta in the position of having substantial financial assets but little to no cash burn. While the company expects Marqeta to remain unprofitable for the immediate future, it also sees little risk of financial strain given the strength of its balance sheet.

Bulls Say: 

  • Marqeta’s platform and open APIs for card issuance continue to attract large and sophisticated firms like Goldman Sachs’ Marcus and Google to its platform, highlighting the strength of its offerings.
  • Marqeta’s existing customer base includes disruptive firms like Square and Klarna, which provides Marqeta with strong organic growth from its existing user base.
  • Marqeta’s cost structure is mostly fixed, allowing the company to naturally expand its margins as volume grows.

Company Description:  

Headquartered in Oakland, California, and founded in 2010, Marqeta provides its clients with a card-issuing platform that offers the infrastructure and tools necessary to offer digital, physical, and tokenized payment options without the need for a traditional bank. The company’s open APIs are designed to allow third parties like DoorDash, Klarna, and Block to rapidly develop and deploy innovative card-based products and payment services without the need to develop the underlying technology. The company generates revenue primarily through processing and ATM fees for cards issued on its platform.

(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.