Tag: Small Caps

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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.

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Shares Small Cap

Since fiscal 2016, Cleanaway has invested in excess of AUD 100 million in greenfield materials recovery, waste treatment, and EfW projects

Business Strategy and Outlook

It is a favourable Cleanaway’s strategy, which seeks to maintain its leading position in commercial and industrial, or C&I, and municipal waste collections and to continue to improve its moat profile by investing in midstream materials recovery assets and, where possible, in downstream disposal assets. Cleanaway’s is the leading player in C&I and municipal waste with around 140,000 C&I customers and some 90 municipal council waste collection contracts. The economics of the waste management industry are overwhelmingly local in nature. Cleanaway’s strong presence in all of Australia’s state capital cities is aimed at local market dominance. This local market dominance in turn delivers route density that better spreads fixed costs–an imperative for profit generation in waste collection. 

Cleanaway is a relative latecomer to disposal, biological treatment, and midstream materials recovery with global players waste management competitors Veolia and Suez possessing high-quality disposal assets Cleanaway cannot replicate. An exit from the Australian market by either player would be the only route to materially increasing disposal earnings. As such, the sale of the Lucas Heights Landfill by Suez to Cleanaway–the result of the Veolia-Suez merger–is a rare windfall. It is hopeful about Cleanaway’s growth into materials recovery which feature more favourable economics than waste collection. Under its “BluePrint 2030” capital allocation strategy, the group will continue to focus investment in materials recovery and energy from waste, or EfW. Since fiscal 2016, Cleanaway has invested in excess of AUD 100 million in greenfield materials recovery, waste treatment, and EfW projects. The recent purchase of the materials recovery assets of SKM Recycling represents a further step toward Cleanaway’s goal of moving further into the industries midstream. 

Further diversifying Cleanaway away from waste collection is the acquisition of Toxfree in late fiscal 2018, skewing Cleanaway’s earnings stream away from collections, the most competitive segment of the waste management value chain.

Financial Strength

Cleanaway debt-funded its acquisition of key Australian post-collection assets from Suez. Leverage–defined as net debt/EBITDA excluding IFRS-16 lease liabilities–sits at 2.24 times at the end of the first half of fiscal 2022, up from 1.0 times at fiscal 2021 year-end. Nonetheless, significant headroom to Cleanaway’s leverage covenant on existing debt facilities–calibrated at 3.0 times–exists. Therefore, balance sheet flexibility exists should further acquisition opportunities arise. It is comforting with Cleanaway’s balance sheet amid COVID-19 induced turbulence. Specifically, Cleanaway’s liquidity position is more than ample to secure the business’ operations without external financing through the medium-term. With minimal debt maturities over the fiscal 2021–fiscal 2024 period, Cleanaway’s sources of cash— those being cash at bank, undrawn debt and operating cash flow–are more than sufficient to fund Cleanaway’s ongoing operations over said period. Cleanaway’s earnings exhibit little volatility through the economic cycle. As a result, its conservatively positioned balance sheet provides ample flexibility for further capital allocation to materials recovery and waste disposal assets —whether bolt-on or greenfield–under Cleanaway’s BluePrint 2030 strategy. Return of capital to shareholders could be considered in the absence of suitable mid- or downstream waste asset investment opportunities.

Bulls Say’s

  • Cleanaway is benefiting from industry consolidation. 
  • Municipal waste contracts provide relatively stable cash flows through the economic cycle. 
  • Capital allocation improved markedly under outgoing CEO Vik Bansal’s guidance.

Company Profile 

Cleanaway Waste Management is Australia’s largest waste management business with a national footprint spanning collection, midstream waste processing, treatment, and valorisation, and downstream waste disposal. Cleanaway is active in municipal and commercial and industrial, or C&I, waste stream segments and in nonhazardous and hazardous liquid waste and medical waste streams following the acquisition of Toxfree in fiscal 2018. While Cleanaway is allocating greater capital to midstream waste processing and treatment, earnings remain skewed toward waste collection. Cleanaway is particularly strong in C&I and municipal waste collection with strong market share in all large Australian metro waste collection markets. 

(Source: MorningStar)

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

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

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

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

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

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

Sky Conducts Due Diligence on Mediaworks Advertising Businesses

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

Business Strategy & Outlook:   

Sky is the monopoly set-top-box based pay-TV services provider in New Zealand, with a satellite distribution platform covering the whole country. It has a grip on key content (particularly sports), and its big subscriber base was relatively sticky until fiscal 2015, given limited home entertainment options. However, Sky’s core content aggregation, bundled-channel distribution, and recurring-subscription-revenue business model is now coming under enormous pressure. Internet-facilitated over-the-top distribution technology is spawning various new players offering subscription on demand streaming services. 

Importantly, emerging competition will continue to affect Sky Network Television’s high-margin, high free cash flow business model. Competition for content from players such as telecommunications companies, Netflix, Amazon, Apple, Google, HBO, and ESPN is likely to put pressure on content costs, while marketing expenses may also increase in response. This is the reason Sky is in the midst of a transition to a multiplatform subscription entertainment provider, with the rejuvenated management especially focused on investing in content and its subscription video on demand business. To make matters worse, the mayhem caused by COVID-19 is directly affecting sporting events, over which Sky has substantial broadcast rights. With these events severely disrupted by the virus, inventory of live sports on Sky will increasingly be compromised, albeit there is corresponding cost relief. Despite these challenges, with a declining capital expenditure profile (another benefit of pivoting to a streaming-centric model) and the May 2020 capital raising, Sky has a sound financial footing to execute the transformation program.

Financial Strengths: 

As at the end of December 2021, Sky had a cash holding of NZD 74 million on the balance sheet and effectively no debt. There is also an undrawn NZD 200 million facility (maturing July 2023). This provides ample firepower for Sky to continue its transformation from a set-top-box, legacy pay TV company to a hybrid satellite-streaming entity.

Bulls Say:  

  • Sky Network Television is a monopoly provider in the New Zealand pay-TV market, with a substantial subscriber base and scale.
  • The company currently has a stranglehold on all the key content with consumer appeal, especially in the sports genre and on an exclusive basis.
  • It enjoys a strong financial position augmented by solid free cash generation, allowing management to good dividends while reinvesting in content, new services, and technology.

Company Description: 

Sky Network Television is the only satellite pay-TV provider in New Zealand, and distributes local and overseas content to its customers through a digital satellite network. It generates subscription and content revenue from these customers. This business is augmented by a free-to-air television channel (Prime) and defensive forays into other distribution channels such as online video-on-demand and online access to live sports.

(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
Shares Small Cap

Rocket Remains in Strong Competitive Position, but Higher Rates Will Lead to Lower Earnings in 2022

price of btc is going to breakout

Business Strategy & Outlook

While Rocket Companies offers a variety of products and services, the firm is best known for its Rocket Mortgage segment, which provides Rocket with most of its revenue. The mortgage industry is fractured and highly competitive, but Rocket has distinguished itself by operating as an entirely digitally lender, originating and servicing its mortgages through its mobile app and website. Rocket has made substantial investments in automating the mortgage process and has been an industry leader in increasing loan processing speed and removing pain points for consumers. These investments along with its control over the appraisal and titling process, through its ownership of Amrock, have allowed the firm to offer an industry-leading mortgage experience to borrowers while also enjoying a cost structure advantage over its competitors. As a digital lender Rocket is able to scale its capacity for mortgage volume up or down quickly since each loan requires less manual attention. This flexibility will be needed as rising mortgage rates push mortgage origination volume well below their 2020 and 2021 highs. Rocket is particularly exposed to this trend as it is strongest in refinance activity and price sensitive first-time homebuyers. As origination activity is curtailed by higher interest rates, the Rocket’s revenue and earnings to fall from 2021, particularly as pricing in the mortgage secondary market has cooled down.

That said, through the full cycle that Rocket will continue to gain market share from other lenders. Consumers have become more comfortable with conducting their finances digitally during the pandemic, and digital lenders, like Rocket, have benefited from this tailwind. Rocket has had strong success in expanding its partner network. New partnerships with firms like Mint and Morgan Stanley, in which these firms offer Rocket’s mortgages to their customers, will help drive growth. While Rocket’s revenue and earnings will likely remain volatile, a symptom of the cyclical nature of the mortgage industry, the company’s strong competitive position and trends in consumer behavior will provide it with long-term secular growth.

Financial Strengths

Rocket operates in a highly cyclical industry, as a result its revenue and earnings have the potential to drop sharply due to economic factors completely out of its control. While Rocket does resell the mortgages it makes within days of origination, the sheer volume of mortgages that Rocket creates means that the company has billions in mortgage debt on its balance sheet at any given point in time. At the end of December, Rocket had more than $19 billion in mortgages, which were financed by equity and less than $13 billion in funding facilities. The combination of volatile revenue and substantial funding needs means that Rocket’s financial strength is an important factor to watch, particularly during slower markets. Despite this, no one can have any significant concerns about Rocket’s financial health at this time. The company has a strong balance sheet and has been able to maintain constant profitability, even during slow periods for mortgage origination. Rocket had over $2.1 billion in cash at the end of December 2021 and only $6 billion in debt not directly tied to its mortgage holdings. With net debt of roughly 1.5 times that projected 2023 EBITDA, Rocket should have more than enough financial resources to see it through a slow mortgage market, should one develop.

Bulls Say

  • Rocket has been steadily gaining market share in both its direct-to-consumer and partner network mortgage origination channels. 
  • Rocket’s digital origination model gives it a cost advantage over its peers and allows it to respond rapidly to market developments. 
  • Rocket has been able to sign major partnerships to expand its partner network. Deals with Morgan Stanley and Intuit’s Mint represent major wins for the company.

Company Description

Rocket Companies is a financial services company that was originally founded as Rock Financial in 1985 and is currently based in Detroit. Rocket Companies offers a wide array of services and products but is best known for its Rocket Mortgage business. The company’s mortgage lending operations are split between its direct-to-consumer lending, which sees borrowers accessing the company’s lending arm directly through either its mobile app or website, and its partner network where mortgage brokers and other firms use Rocket’s origination process to offer loans to their customers. The company has rapidly gained market share in recent years and is now the largest mortgage originator in the U.S. as well as the servicer for more than 2 million loans. 

(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

Nanosonics’ Third Quarter Largely Consistent With its Second; Shares appear Modestly Overvalued

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

Business Strategy & Outlook:   

Nanosonics’ trophon solution for high-level disinfection, or HLD, of ultrasound probes has garnered substantial market share, as evidenced by penetration of over 75% in Australia and New Zealand and 40% in North America. The elevated growth over the next three years as Trophon continues to gain share in North America and launch in Japan, but high market penetration may be more challenging to achieve in developing economies, which may not be able to prioritise nuanced disinfection standards. Moreover, the device patent expires in 2025, leading to slower volume growth in the medium term. Nonetheless, Nanosonics has a razor-and-blade business model and the installed trophon base supports an ongoing revenue stream from high margin consumables. In 2021 consumables contributed 63% of group revenue. The consumables revenue stream as more secure as its protected from generic substitution until fiscal 2029, and forecast these sales climbing to over 70% of Trophon revenue over the next 10 years. 

Nanosonics primarily distributes via GE Healthcare, its partner across multiple geographies. Recently Nanosonics established a direct sales team in North America, adding to the operating cost base, however, it is expected to see expanding gross margins from this and increasing revenue contribution from consumables. The estimated consumables to roughly earn a gross margin of 85% and devices 65% by fiscal 2026. Outside of trophon, the company expects to launch a new product in flexible endoscope cleaning in 2023. Previously, management intimated the addressable market to be equivalent to trophon and there is greater awareness of the infection issue this product addresses. The broad assumptions of a similar roll-out pattern to trophon from fiscal 2024 onwards and equivalent margins. This supports the views that consolidated companys EBITDA margins will climb to 35% by fiscal 2031 versus 14% in fiscal 2021. The pipeline product contributes roughly 16% of the fair value.

Financial Strengths:  

Nanosonics is in a net cash position and free cash flow positive. The operating model does not require significant capital investment, with the key investments for growth stemming from ongoing R&D spending, building out a salesforce and working capital. Despite having 60-day terms from distribution partners, the current net investment in working capital runs at approximately 28% of revenue due to high inventory holding levels which average roughly 200 days in stock. The forecasted net investment in working capital to remain in line with historical figures, but note it is possible to elevate in the near term as inventory is built up prior to the new product launch and in the early roll-out phase. The company first posted a profit in fiscal 2016 and is yet to pay a dividend, nor it is expected in the future as it invests in underpenetrated markets and its pipeline product. However, the company has free cash flow positive and they forecast it to convert roughly 72% of net income into free cash flow in a typical year.

Bulls Say: 

  • Nanosonics is the market leader in automated HLD of ultrasound probes with significant further market penetration potential in most regions.
  • Establishing its direct distribution model should increase the gross margins achieved by Nanosonics once it reaches critical mass.
  • The company has reached a pivotal point where higher margin consumables dominate the revenue stream. This revenue stream is also protected by patents and the installed trophon device base.

Company Description:  

Nanosonics is a single-product company and its trophon device provides high-level disinfection, or HLD, of ultrasound probes used in semi-critical procedures. The patented technology uses low temperature sonically activated hydrogen peroxide mist that is suitable for probes sensitive to damage. Automated HLD is increasingly being adopted as the standard of care globally as it is superior in preventing cross-infection across patients. Nanosonics’ revenue is made up of capital sales of trophon units, ongoing consumables sales, and service revenue. At June 2021, there were 26,750 trophon units installed globally. Market penetration rates range from over 75% in Australia and New Zealand, roughly 40% in the United States to low-single-digit penetration in EMEA and elsewhere in Asia-Pacific.

(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.

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Shares Small Cap

Kilroy Realty Corp: Vacancy rates in Los Angeles and San Francisco office markets were recorded at 20.8% and 21.9% respectively in Q1 2022

Business Strategy and Outlook

Kilroy Realty is a REIT that owns, develops, acquires, and manages premier office, life science, and mixed-use real estate properties in Los Angeles, San Diego, San Francisco Bay Area, Seattle, and Austin. It owns over 115 properties consisting of approximately 15 million square feet. The company has positioned itself to benefit from the burgeoning life sciences sector with material exposure in its current portfolio and future development pipeline. It is also greeted, management’s focus on ESG as it aligns its office portfolio to meet the sustainability requirements of its clients.

Kilroy’s management has been able to successfully time the boom in technological employment occurring in the largest metropolitan areas along the West Coast. The company’s strategy is to achieve long-term sustainable growth by developing and owning the highest quality real estate in technology and life science market clusters. The quality of their portfolio is evident from the fact that its average age is just 11 years compared with 30 years for peers. 

The economic uncertainty emanating from pandemic recovery and the remote work dynamic have together created a challenging environment for office owners. Employees are still hesitant at returning to the office as office utilization remains around 45% of the pre-pandemic level. The vacancy rates in Los Angeles and San Francisco office markets were recorded at 20.8% and 21.9% respectively in Q1 2022. The current vacancy rate in both these cities is substantially higher than the vacancy rates during the height of the global financial crisis. The net absorption rate in West Coast markets remains negative to marginally positive as of Q1 2022 and rental growth figures are disappointing especially given the inflationary environment. Having said this, it can be seen that an increasing number of companies requiring their employees to return to the office. In the long run, it is held that that remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centrepiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.

Financial Strength

Kilroy Realty is in sound financial health. The company’s total debt was $4.1 billion as of the end of the first quarter in 2022, resulting in a debt/EBITDA ratio of 6.6 times. It can be pointed out that the debt/EBITDA ratio should trend lower over the next few years as fundamentals recover and EBITDA sees healthy growth. The weighted average interest rate on the company’s debt was 3.70% and the weighted average maturity period was 7.0 years. The maturity schedule of the company’s debt shows that there are no major debt maturities until the end of 2024 and the maturities are adequately spread. It can also be appreciated that the fact that in an increasing interest rate environment 100% of the company’s debt is fixed-rate debt. It is held that the leverage used by the company to fund its capital structure is appropriate given the high-quality office portfolio. The fixed-charge coverage ratio, which is a ratio of EBITDA divided by all fixed expenses (including interest expenses), was 3.5 times and the interest coverage ratio was 8.4 times as of the end of the first quarter of 2022. As a real estate investment trust, Kilroy Realty is required to pay out at least 90% of its income as dividends to shareholders. The FAD pay-out ratio which is a ratio of dividends to funds available for distribution was reported at 67.0% for the year 2021. This shows that the company is generating sufficient cash to cover its fixed expenses and pay-out dividends. The company is also in a comfortable position with respect to liquidity as it has a robust liquidity position of around $1.4 billion including the cash on the balance sheet and the revolving credit facility. This gives the firm enough flexibility to fund its operations, pay dividends, pursue inorganic growth, and invest in organic development opportunities.

Bulls Say’s

  • Kilroy’s focus on technology and life science market clusters should benefit the firm in the long run as wit is alleged that buoyant growth in these areas. In addition to this, the company’s high-quality office buildings with good amenities should benefit from the flight to quality trend. 
  • Kilroy’s management team has demonstrated that it is able to successfully recycle capital and pursue growth over the past business cycle. 
  • Regulatory barriers to construction in West Coast cities such as Los Angeles and San Francisco mean Kilroy will continue to benefit from muted supply.

Company Profile 

Kilroy Realty is a premier owner and landlord of approximately 15 million square feet of office space across Los Angeles, San Diego, the San Francisco Bay Area, and greater Seattle. The company operates as a real estate investment trust. 

(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.

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Shares Small Cap

Waiting to Hear Seven’s Voice on Capital Management

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Business Strategy & Outlook: 

Seven, which generates the majority of its earnings through Seven Network’s free-to-air TV and broadcast video on demand units, offers exposure to the AUD 3.8 billion total Australian television advertising market. It is a media segment that has remained largely flat during the past 10 years, after consistently enjoying growth of about 6% in the preceding decade. The slowing growth has been caused by proliferating digital media alternatives, rapidly changing entertainment consumption habits, and increasing high-speed broadband adoption. Indeed, the structural headwinds have been such that the free-to-air television industry’s share of the Australian total advertising pie has slumped from more than 35% in the mid-2000s to just over 20% now, as advertisers follow eyeballs to digital media platforms. 

Within this mature industry, Seven Network commands the number-one or two position, with a 38%-40% rating and revenue share of the commercial metropolitan free-to-air television market. Its library of extensive sports and general entertainment programming has aided in the rise of these share metrics in recent years. Seven Network can maintain revenue shares at the 38.0% level on a long-term, midcycle basis. The key investment consideration comes down to Seven Network’s EBIT margin outlook. This is important in the face of increasing competition for viewers (from proliferating new digital entertainment options) and for content (from digital upstarts and incumbent television broadcasters). The group’s exposure to the even more structurally challenged print media industry is another key issue facing investors in Seven West Media. Earnings from the newspaper division have slumped from almost AUD 140 million in fiscal 2011 to AUD 28 million in fiscal 2021. However, combined profits from the print media business now account for less than 10% of the group’s total.

Financial Strengths:

The strong progress in balance sheet repair in recent years has vaporised the key concern regarding the group’s financial position. This is reflected in company’s net debt/EBITDA forecast of 0.8 by the end of fiscal 2022.

Bulls Say:  

  • Seven West Media commands a strong position in the Australian free-to-air television industry, with leading ratings and revenue shares.
  • The unique antisiphoning regime in Australia ensures that Seven Network will continue to have a stronghold on marquee live sports programming, such as the Australian Football League, cricket, and other sports events of national importance. 
  • Seven Network creates and produces about 70% of its television programming (excluding sports), far more than its peers, allowing the company to capture much of the content value chain in proliferating media channels.

Company Description: 

Seven West Media operates Seven Network, a free-to-air television network spread across five capital cities, as well as in regional Queensland. It also owns most of the newspapers circulating in Western Australia (including the monopoly Perth title called West Australian Newspapers), as well as the country’s second-largest magazine publishing group (Pacific Magazines). In the Australian online space, it operates broadcast on demand, or BVOD, service called 7plus.

(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.

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Shares Small Cap

Stericycle’s self-help measures and significant exposure to the growing United States medical waste market

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Business Strategy and Outlook

Since its founding in 1989, Stericycle has been extremely acquisitive, having acquired over 500 companies. On the surface, this acquisitive strategy led to a lengthy period of impressive growth and the firm built unmatched scale. However, acquisitions began to stray from Stericycle’s core competencies and poor integration efforts caused inefficiencies to build. After decades of strong growth and profitability, Stericycle’s financial performance began to deteriorate in 2017. However, with a refreshed management team, led by CEO Cindy Miller, it is now seen Stericycle has turned the corner. With Miller at the helm, Stericycle has divested low-margin, noncore businesses, most notably, environmental solutions. The enterprise resource planning implementation project continues, and it is likely to be completed within the next couple of years. A common ERP system will streamline Stericycle’s operations and improve the firm’s financial planning and analysis. Finally, Miller has implemented much needed oversight and standardization, for example, customer contracts are now reviewed by a deal review committee. 

Management’s turnaround efforts are taking hold. Despite the global pandemic, Stericycle’s regulated waste and compliance services business reported 2% organic growth in 2020 (after flat organic growth in 2019 and a 2% organic decline in both 2018 and 2017), and consolidated gross margin improved 60 basis points year over year after six consecutive years of gross margin contraction. In 2021, RWCS registered nearly 6% organic revenue growth, and the secure information destruction services business reported 5% organic growth. 

Stericycle’s self-help measures and significant exposure to the growing United States medical waste market should result in solid top-line growth and margin expansion over the next five years. It is foreseen, Stericycle’s revenue to grow at about a 4% five-year compound annual rate and adjusted EBITDA margin to expand to around 23.5% by 2025-26 from (17.5% to 18.5% during 2019-21). Most importantly, it is alleged for return on new invested capital will rebound to the low double digits by 2024.

Financial Strength

Stericycle’s debt balance increased by over $1.5 billion in 2015 a result of the Shred-It acquisition. As the company’s financial performance deteriorated in subsequent years, the firm’s net debt/EBITDA ratio swelled to approximately 4.5. However, the current management team is committed to rightsizing the balance sheet, and the firm’s leverage ratios have already become more palatable (net debt/adjusted EBITDA was about 3.4 as of December 2021). Stericycle ended its first-quarter 2022 with $1.65 billion of net debt. The firm’s outstanding balance on its credit facility and term loan (approximately $540 million) is due in 2026, $600 million of 5.375% senior notes is due in 2024, and $500 million of 3.875% senior notes is due in 2029. Over the next five years, it is projected Stericycle will generate approximately $1.7 billion of free cash, so about the firm’s ability to service its outstanding debt is not a concern, and it is held, management’s goal of reducing its net debt/adjusted EBITDA ratio below 3 is achievable. Stericycle has plenty of liquidity with $60 million of cash on the balance sheet and over $790 million available on its $1.2 billion credit facility.

Bulls Say’s

  • Stericycle’s turnaround efforts will prove successful, materially improving the firm’s profitability and free cash flow. 
  • Medical waste volume should grow faster than U.S. GDP due to an aging population that requires more medical procedures. Stericycle’s leading position in an expanding market should improve the firm’s financial prospects. 
  • Stericycle is past the apex of pricing pressure related to private practice consolidation and a customer class action lawsuit. Going forward, the firm should realize annual price increases above inflation.

Company Profile 

Stericycle is the largest provider of medical waste disposal and data destruction (primarily paper shredding) services in the United States. Its next closest national competitor in the medical waste disposal space is Sharps Compliance, which generated $76 million of sales in fiscal 2021 (about 4% of Stericycle’s global regulated waste and compliance revenue). Stericycle’s data destruction business (Shred-It) is about twice the size of its closest competitor (Iron Mountain’s information destruction segment). Stericycle has a global presence, with about 20% of its revenue earned outside North America. 

(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.

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Shares Small Cap

Commerzbank’s latest strategy is the right one toward a better future, despite the herculean task ahead

Business Strategy and Outlook

Commerzbank generates about 70% of its operating income in the highly competitive German market, where banks without profit-maximizing motives (savings and cooperative banks) dominate the retail space and German as well as international competitors vie for the coveted German corporate market. In this competitive environment, Commerzbank has too long stuck to its large branch network strategy, failing to digitize processes sufficiently to compete in today’s changing banking landscape. Management is addressing these shortcomings with a highly ambitious plan. Until 2024, the bank aims to reduce its cost base by EUR 1.4 billion, or about 20% of its 2020 level. The largest cost savings will come from a reduction of about 10,000 in head count and 550 branch closures. After such a massive cut to its business, management believes it can achieve a return on tangible equity of 7%.

It is true that Commerzbank is addressing the obvious hurdles toward a more profitable future with its current plan. Yet given the competitive market in Germany, the reorganization may also provoke customer churn and bring revenue down with it. Commerzbank has been coveted as a takeover target by multiple European banks over the last couple of years. This was partially owed to its strong position in the German corporate market, but also the potential gains to be made via a heavy cost-cutting initiative. Commerzbank has now switched course, in experts view, and is taking matters into its own hands rather than hoping for a white knight. It is unexpected for European cross-border banking consolidation to commence anytime soon. As such, it is held, Commerzbank’s latest strategy is the right one toward a better future, despite the herculean task ahead.

Financial Strength

Commerzbank is in good financial health. The bank has cleaned up its balance sheet after its acquisition of Dresdner Bank in 2008 and derisked its exposure to bad loans in shipping, commercial real estate, and public finance. At the end of the first quarter of 2022, the bank posted a common equity Tier 1 ratio of 13.5% versus a requirement of 9.4%.

Bulls Say’s

  • Commerzbank is addressing its large cost base, setting the bank up for greater profitability in the future. 
  • The bank is in good financial health and has successfully run down its bad exposures in shipping, public finance, and commercial real estate. 
  • The efficiency program, cost-cutting efforts, and digitalization strategy will create a leaner and more agile Commerzbank.

Company Profile 

Commerzbank operates primarily in Europe. Germany contributes about 70% to total income. The bank operates two business segments: private and small-business customers as well as corporate clients. In its private and small-business segment, the group runs its branch business, a mobile bank with a focus on the Polish market, an online broker, and an asset manager for physical assets. Its corporate client business provides cash management and trade finance solutions to small and medium-size enterprises and large corporates. 

(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.