Tag: Small Caps

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Nitro Software expects attractive growth runway

Investment Thesis

  • Sizeable market opportunity of US$28bn TAM (company estimates which is based on ground up model taking into account customer contract values).
  • Established a solid foundation to build from – the Company has penetrated 68% of the Fortune 500 companies and whilst initial involvement with these companies may be small however it provides opportunity to scale up with these customers (approx. 10% of the Fortunes 500 customers have 100 or more licensed users).  
  • Structural tailwinds – ongoing migration to online with businesses looking to digitize manual, paper driven processes.
  • Looking to become a platform.
  • Attractive recurring revenue base via subscriptions. 
  • Investment in R&D to continue developing the Company’s competitive position and enhance value proposition with customers.   

Key Risks 

  • Rising competitive pressures, especially the larger players like Adobe Inc and DocuSign
  • Growth disappoints the market, given the company trades on high valuation multiples – growth in subscriptions, new customers and penetration of existing clients. 
  • Product innovation stalls and fails to resonate with customers. 
  • Emergence of new competitors and technology.

Bulls Say’s

  • Revenue excluding Connective of US$50.7m, was up +26%, and at the top end of the upgraded guidance range. Revenue including Connective was US$50.9m. Annual Recurring Revenue (‘ARR’) excluding Connective was US$40.1m, up +41% and in line with guidance (reaffirmed in October 2021 of US$39m – US$42m). ARR including Connective was US$46.2m, up +62%.
  • Operating EBITDA loss excluding Connective was US$7.4m, and including Connective was US$7.6m, in line with the upgraded guidance range of US$7.5m – US$8.0m provided by the Company in January 2022, and significantly lower than the guidance range of US$11m – US$13m provided at the beginning of FY2021.
  • NTO exceeded 1m active subscription PDF licences, reaching 1.1m at FY21-end.
  • NTO executed 2.2m Nitro Sign eSignature requests excluding Connective eSignatures, up +102%, and more than 22m eSignature requests including Connective.
  • NTO completed a A$140.0m capital raise and hence NTO retains a strong balance sheet with no debt and cash and cash equivalents of US$48.2m including Connective.

Company Profile 

Nitro Software Ltd (NTO), founded in 2005 & listed in 2019, is a global document productivity software company. NTO offers integrated PDF productivity, eSignature and business intelligence (BI) tools through a horizontal SaaS and desktop-based software suite. The Company helps customers move to 100% digital document workflows, eliminating paper and accelerating business processes. NTO serves customers around the world and counts 68% of the Fortune 500 companies among its customers. In total, NTO has over 12,000 business customers (who are defined as having at least 10 licensed users) and across 155 countries.  

(Source: BanyanTree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Small Cap

Invocare ltd operating revenue was up 11% to $527.1m with acquisitions executed in 2H20 contributing $26.7m

Investment Thesis

  • Trades in-line with our blended valuation (DCF / PE-multiple). IVC is currently trading on a 12-mth blended forward PE-multiple of 30.0x and 2.4% dividend yield. 
  • IVC continues to be impacted by Covid-19 and associated lockdown/containment measures.
  • Potential for increased death rates.
  • Continued cost control from strategic review and operational efficiency.
  • IVC benefits from demographics and long-term population growth.
  • IVC holds leading market positions in its core markets.
  • IVC has strong cash flow conversion and generation.
  • High barrier to entry with quality assets and a business model that is difficult to replicate.  
  • Increased competition from budget operators in Australia.

Key Risks

  • Continued reduction in death rate compared to expectations/forecasted trend.
  • Increased competition especially around pricing.
  • Protect and Grow 2020 does not yield incremental returns as anticipated.
  • Underperformance of funds under management.

FY21 Results Highlights

  • Statutory Revenue of $532.5m, up +11%.
  • Operating Revenue up +11% to $527.1m.
  • Operating EBITDA up +22% to $125.5m, with a return to positive operating leverage.
  • Operating EBIT up +36% to $77.8m.
  • Reported Profit After Tax of $80.2m, was higher than the loss of $11.5m in the pcp.
  • IVC achieved strong cashflow conversion of 105%, ROCE of 11.2% and leverage ratio of 1.2x.
  • Operating EPS of 31.6 cents, up 51% on pcp.
  • The Board declared a final fully franked dividend of 11.5cps which takes Full Year dividends to 21.0cps (equating to 66% dividend payout ratio).
  • IVC maintained a strong balance sheet with net debt at $144m at year-end, representing a leverage of 1.2x, a slight improvement on the pcp.  

Company Profile 

InvoCare Ltd (IVC) is the largest private funeral, cemetery and cremation operator in the Asia Pacific Region. It has leading market positions in countries like Australia, New Zealand, and Singapore. 

(Source: BanyanTree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

MVF reported solid 1H22 results; Growing above industry growth resulting in market share of 20.8% in key domestic markets

Investment Thesis

  • High barriers to entry with unique expertise and assets. 40-year heritage of leadership in science and innovation in ARS and women’s imaging, coupled with the depth of experience from the doctors and clinical team which will continue to underpin MVF’s future growth and maintain treatment success rates.
  • Aging Australian population and increased age of mothers (especially with the trend of more females choosing career over family until their early thirties) will provide favourable demographic tailwinds.
  • Improving balance sheet with flexibility to execute expansion strategies. Earnings increasingly become diversified as the Malaysian business gains momentum. 
  • Potential earnings diversification and growth via international expansion and increased presence in diagnostics.
  • Demonstrated capacity to perform well in terms of cost out and earnings growth despite tough conditions (i.e., lower cycle volumes).
  • Transparent and detailed disclosures.

Key Risk

  • Low growth environment impacting earnings.
  • Regulatory risk as changes in government funding may increase patient’s out-of-pocket expenses and thereby volume demand. 
  • Fluctuations in the availability and size of Medicare rebates may negatively influence the number of IVF cycles administered and overall industry revenue 
  • The Australian market does not rebound following this period of downturn. Population of males and females with fertility problems decline.
  • Loss of key specialists.
  • Loss of market share especially to low-cost providers, with one already appearing in Victoria.
  • Weakening economic activity resulting in increased unemployment leading to less disposable income to be spent in IVF treatment.
  • Execution of international forays into Malaysia goes poorly.

1H22 results summary:  Relative to the pcp:

  • Revenue increased +11.2% to $101m, largely driven by domestic stimulated cycles growth of +6.6% and average ARS revenue per stimulated cycle growth of +4.4%, partially offset by decline in ultrasound scan volumes. 
  • Adjusted EBITDA of $26.8m, increased +8.5% with volume leverage gained from increased domestic IVF activity partly offset by short-term margin declines in Ultrasound and Kuala Lumpur, pandemic related costs and $1m increase in medical malpractice and D&O liability insurance reflecting appropriate insurance policies in the current settings. 
  • Adjusted NPAT of $13.4m increased +11.7% and came in +3.1% ahead of management’s guidance. Reported NPAT declined -17.6% to $12.2m, primarily due to receipt of Job Keeper subsidies in pcp. 
  • FCF (excluding job keeper subsidy receipts in pcp) increased +51.6% to $9.7m, driven by 83% cash conversion of EBITDA to pre-tax operating cash flows and a decline of -42% in capex to $3.6m. 

Growing above industry growth and gaining market share

IVF industry fundamentals remain attractive including advanced maternal age and stable and continued government funding, which saw positive industry momentum continue in the half with industry volume growth at +3.6% and MVF recording above-industry growth of +6.6% resulting in market share gains of +70bps to an overall market share of 20.8% in key domestic markets. 

Company Profile

Monash IVF Group Ltd (MVF) offers assisted reproductive technology services, ultrasound services, gynecological services, in-vitro fertilization services, consultancy services and general clinical services to patients in Australia and Malaysia. MVF comprises 40 clinics and ultrasound practices and employs ~100 doctors and has a network of 650 associated health professionals. 

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

Qube Working Towards Cost Effective Supply Chain

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy and Outlook

Qube’s strategy is to consolidate the fragmented logistics chain surrounding the export and import of containers, bulk products, automobiles, and general cargo, to create a more efficient and cost-effective supply chain. The business has enjoyed some successes to date, though significant scope for industry consolidation remains. 

It is alleged Qube to generate robust earnings growth over the long term on acquisitions, developments and organic growth. The domestic port logistics industry has traditionally been very fragmented, highly competitive, and inefficient. Currently, there are more than 250 operators providing port logistics services in one segment of the market. These are typically small operators with limited geographic scope offering limited point-to-point services. Qube’s strategy is to provide a broad range of services nationwide, touching multiple segments of the import/export supply chain. Analysts are supportive of this strategy and believe there is significant scope for further industry rationalisation. 

Consolidating the fragmented logistics chain should significantly improve Qube’s competitive position. Qube has already established a dominant market share in some specific port logistics offerings, particularly with regards to rail haulage services to and from Port Botany. Successfully developing its strategic land holdings into inland intermodal terminals should add materially to Qube’s future earnings and support cost advantages to less efficient peers. Qube aims to develop inland rail terminals as an alternative to moving container volumes from port via road. When fully developed, Moorebank will be Australia’s largest inland intermodal terminal. The bulk and general segments are highly fragmented and competitive but Qube is one of the largest players, with operations at 28 city and regional ports. The automotive stevedoring business operates in a duopoly market structure, holding long-term off-ship transportation, processing and storage contracts with major foreign vehicle manufacturers.

Financial Strength

Following the sale of Moorebank warehouses, Qube is in strong financial health. Gearing (net debt/net debt plus equity) was 10% in December 2021, well below Qube’s 30%-40% long-term target range. It has less than AUD 400 million in debt after receiving the upfront component of Moorebank sale proceeds, providing ample headroom to fund developments and bolt-on acquisitions. A special dividend or share buyback is likely in 2022. It is projected net debt/EBITDA to fall from 3.8 at June 2021 to below 2 times in 2022 and for the medium term. Qube’s businesses have delivered steadily increasing operating cash flow in recent years, though operations remain cyclical. Recent growth initiatives should generate strong future cash flow, though a large-scale acquisition or development project may require new equity funding. Qube has significant capital expenditure requirements including Moorebank development. Qube is committed to paying 50%-60% of earnings per share before amortisation as dividends.

Bulls Say’s

  • There is significant potential to increase efficiency through vertical integration of port logistics services. Qube will attempt to deliver on this strategy through consolidation and integration. 
  • The Moorebank Intermodal Terminal should become a key piece of Sydney’s transport infrastructure, driving strong returns for Qube. 
  • Senior management has a proven track record in the port logistics segment and has demonstrated an ability to generate strong returns for shareholders

Company Profile 

Qube has three main divisions: operating; property; and Patrick. Operating undertakes road/rail transportation of containers to and from port, operation of container parks, customs/quarantine services, warehousing, intermodal terminals, international freight forwarding, domestic stevedoring, and bulk transport. Patrick is the container terminals business acquired from Asciano, and the property division includes tactical land holdings in Sydney. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Temple & Webster Group strong focus on reinvesting earnings back into business

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

Investment Thesis

  • Operates in a large addressable market – B2C furniture and homewares category is approx. $16bn. 
  • Structural tailwinds – ongoing migration to online in Australia in the homewares and furniture segment. At the moment less than 10% of TPW’s core market is sold online versus the U.S. market where the penetration rate is around 25%.  
  • Strong revenue growth suggests TPW can continue to win market share and become the leader in its core markets. 
  • Active customer growth remains strong, with revenue per customer also increasing at a solid rate. 
  • Successful execution in new growth pillars – Trade & Commercial (B2B) and Home Improvement. 
  • Management is very focused on reinvesting in the business to grow top line growth and capture as much market share as possible. Whilst this comes at the expense of margins in the short term, the scale benefits mean rapid margin expansion could be easily achieved. 
  • Strong balance sheet to take advantage of any in-organic (M&A) growth opportunities, however management is likely to be very disciplined. 
  • Ongoing focus on using technology to improve the customer experience – TPW has invested in merging the online with the offline experience through augmented reality (AR). 

Key Risks

  • Rising competitive pressures.
  • Any issues with the supply chain, especially because of the impact of Covid-19 on logistics, which affects earnings / expenses. 
  • Rising cost pressures eroding margins (e.g., more brand or marketing investment required due to competitive pressures).
  • Disappointing earnings updates or failing to achieve growth rates expected by the market could see the stock price significantly re-rate lower. 
  • Trading on high PE-multiples / valuations means the Company is more prone to share price volatility. 

1H22 Result Highlights

  • TPW delivered strong top line growth of +46% YoY for 1H22, despite experiencing some supply chain and product availability issues (which also impacted customer satisfaction metrics). Hence the growth rate would have likely been stronger in our view. The Company also saw some inflationary pressures on product and freight, which saw 1H22 delivered margin decline to 30.5% (from 33.0% in pcp) and was in line with management’s previous guidance.
  • Advertising & Marketing costs were up +55% YoY and increased as a percentage of revenue to 13.6% (from 12.8% in pcp), driven by a step up in both performance and brand marketing. TPW’s brand awareness continues to increase, now above 60%. Management also spoke about pushing the brand awareness strategy nationally.
  • TPW’s ongoing investment in the business (people and technology, new growth horizons in B2B and home improvement) saw fixed cost increase YoY and hence saw EBITDA decline -19% YoY to $12.0m.
  • TPW posted the sixth straight quarter of revenue per active customer growth, which was up +10% YoY. This was driven by higher average order value and the repeat rate. 

Company Profile 

Temple & Webster Group (TPW) is a leading online retailer in Australia, which offers consumers access to furniture, homewares, home décor, arts, gifts, and lifestyle products. 

(Source: BanayanTree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Sectors Small Cap

Temple & Webster Group strong focus on reinvesting earnings back into business

Investment Thesis

  • Operates in a large addressable market – B2C furniture and homewares category is approx. $16bn. 
  • Structural tailwinds – ongoing migration to online in Australia in the homewares and furniture segment. At the moment less than 10% of TPW’s core market is sold online versus the U.S. market where the penetration rate is around 25%.  
  • Strong revenue growth suggests TPW can continue to win market share and become the leader in its core markets. 
  • Active customer growth remains strong, with revenue per customer also increasing at a solid rate. 
  • Successful execution in new growth pillars – Trade & Commercial (B2B) and Home Improvement. 
  • Management is very focused on reinvesting in the business to grow top line growth and capture as much market share as possible. Whilst this comes at the expense of margins in the short term, the scale benefits mean rapid margin expansion could be easily achieved. 
  • Strong balance sheet to take advantage of any in-organic (M&A) growth opportunities, however management is likely to be very disciplined. 
  • Ongoing focus on using technology to improve the customer experience – TPW has invested in merging the online with the offline experience through augmented reality (AR). 

Key Risks

  • Rising competitive pressures.
  • Any issues with the supply chain, especially because of the impact of Covid-19 on logistics, which affects earnings / expenses. 
  • Rising cost pressures eroding margins (e.g., more brand or marketing investment required due to competitive pressures).
  • Disappointing earnings updates or failing to achieve growth rates expected by the market could see the stock price significantly re-rate lower. 
  • Trading on high PE-multiples / valuations means the Company is more prone to share price volatility. 

1H22 Result Highlights

  • TPW delivered strong top line growth of +46% YoY for 1H22, despite experiencing some supply chain and product availability issues (which also impacted customer satisfaction metrics). Hence the growth rate would have likely been stronger in our view. The Company also saw some inflationary pressures on product and freight, which saw 1H22 delivered margin decline to 30.5% (from 33.0% in pcp) and was in line with management’s previous guidance.
  • Advertising & Marketing costs were up +55% YoY and increased as a percentage of revenue to 13.6% (from 12.8% in pcp), driven by a step up in both performance and brand marketing. TPW’s brand awareness continues to increase, now above 60%. Management also spoke about pushing the brand awareness strategy nationally.
  • TPW’s ongoing investment in the business (people and technology, new growth horizons in B2B and home improvement) saw fixed cost increase YoY and hence saw EBITDA decline -19% YoY to $12.0m.
  • TPW posted the sixth straight quarter of revenue per active customer growth, which was up +10% YoY. This was driven by higher average order value and the repeat rate. 

Company Profile 

Temple & Webster Group (TPW) is a leading online retailer in Australia, which offers consumers access to furniture, homewares, home décor, arts, gifts, and lifestyle products. 

(Source: BanayanTree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

Bapcor Ltd: Likely to Deliver Pro Forma Earnings In FY22

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

Investment Thesis:

  • Trading below our valuation. 
  • Fundamentals for the vehicle aftermarket continue to remain strong (with increase in second-hand vehicle sales; travellers seeking social distancing and hence moving away from public transport; with Covid lockdown measures in forced, more people are spending their holidays domestically utilizing their vehicles).
  • Significant opportunities within BAP to drive growth (expanding network; increase market share by leveraging BAP’s Victorian DC; enhance supply chain efficiencies; driven own brand growth).
  • Strong earnings growth profile. 
  • Further opportunity to grow gross profit margins from better buying terms with tier one and two suppliers. 
  • Significant distribution network across Australia to leverage from.
  • Ongoing bolt on acquisitions and associated synergies.
  • Growing BAP’s own brand strategy, which should be a positive for margins. BAP is on track to reach their 5-year targets to supplement market leading brands with BAP’s own brand products.
  • Weak macro story of leveraged Australian consumer and lower growth environment persisting.
  • Thailand represents a meaningful opportunity in our view. 

Key Risks:

  • Rising competitive pressures.
  • Value destructive acquisition. 
  • Rising cost pressures eroding margins (e.g. more brand or marketing investment required due to competitive pressures).
  • Given the high trading multiples the stock trades at, a disappointing earnings update could see the stock price significantly re-rate lower. 
  • Integration (and therefore synergies) of recent acquisitions underperform market expectations. 
  • Execution risk around Thailand. 

Key highlights:

BAP struggled against Covid-19 lockdowns and restrictions over 1H22, delivering revenue growth of +1.9% over pcp to $900.1m, with own brand sales percentage increasing across all segments, with revenue picking up during 2Q, in line with easing restrictions. Management expects to achieve strong growth in 2H22. 1H22 EBITDA fell -5.8%, impacted by the transition to its Victoria distribution centre and support provided to staff. The Company made some significant leadership changes, appointing former CFO Noel Meehan as the new CEO following CEO/Managing Director Darryl Abotomey’s retirement. BAP has ample balance sheet liquidity.

  • Capital management. (1) The Board declared a fully franked interim dividend of 10cps, up +11.1% over pcp. (2) The balance sheet remained strong with ample liquidity with cash increasing +101.5% over 2H21 to $79.8m and net debt of $203M (up +23.7% over 2H21) leading to a leverage ratio of 1.0x, providing the Company with significant financial flexibility to be able to respond rapidly to acquisition opportunities and continue to invest in high returning projects. (3) Management continued investments in locations to support Truckline and Autobarn networks, expanded geographic footprint with BAP now having a presence in over 1,100 locations throughout Australia, New Zealand and Thailand, and signed 2 acquisitions adding annualised revenue of $50m at mid-single digit EBITDA multiples (pre-synergies).
  • Supply chain. Management continued to develop group logistics capabilities, transitioning three largest warehouses in Victoria, Nunawading (Retail), Preston (Trade) and Derrimut (Wholesale) which represent 80% of volumes, to new consolidated distribution centre at Tullamarine, which is expected to deliver operating expense savings of $10m and inventory improvement of $8m. 
  • New CEO appointed. Following CEO and Managing Director Darryl Abotomey’s retirement, the Company has appointed former CFO Noel Meehan as the new CEO, with recruitment for a new CFO currently underway. In our view, this is a good outcome and more likely to lead to a stability in strategy.
  • Growing proportion of private label sales. Own brand sales percentage increased across all segments, with Bapcor Trade delivering 29.6% (up +50bps over 2H21), Retail delivering 33.9% (up +120bps over 2H21), Speciality Wholesale delivering 54.6% (up +130bps over 2H21) and New Zealand delivering 30.3% (up +40bps over 2H21), with the Company remaining on track to reach its 5-year targets to supplement market leading brands with BAP’s own brand products, which should be a positive for margins.

Company Description: 

Bapcor Ltd (BAP) is Australasia’s leading provider of aftermarket parts, accessories and services. The core businesses of BAP are: (1) Trade – Burson Auto Parts is a trade focused parts professional supplying workshops with all their parts and accessories. (2) Retail – Autobarn is the premium retailer of auto accessories and Opposite Lock specializes in 4WD accessory specialists. (3) Independents – supporting the independent parts stores via the group’s extensive supply chain capabilities and through brand support. (4) Specialist Wholesaler – the number 1 or 2 industry category specialists in parts supply programs. (5) Services – experts at car servicing through Midas and ABS. 

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

BAP Trading on an attractive FY23E PE Multiple of 18.1x and yield at 3.0%

Investment Thesis

  • Trading below our valuation. 
  • Fundamentals for the vehicle aftermarket continue to remain strong (with increase in secondhand vehicle sales; travelers seeking social distancing and hence moving away from public transport; with Covid lockdown measures in forced, more people are spending their holidays domestically utilizing their vehicles).
  • Significant opportunities within BAP to drive growth (expanding network; increase market share by leveraging BAP’s Victorian DC; enhance supply chain efficiencies; driven own brand growth).
  • Strong earnings growth profile. 
  • Further opportunity to grow gross profit margins from better buying terms with tier one and two suppliers. 
  • Significant distribution network across Australia to leverage from.
  • Ongoing bolt on acquisitions and associated synergies.
  • Growing BAP’s own brand strategy, which should be a positive for margins. BAP is on track to reach their 5-year targets to supplement market leading brands with BAP’s own brand products.
  • Weak macro story of leveraged Australian consumer and lower growth environment persisting.
  • Thailand represents a meaningful opportunity in our view. 

Key Risks

  • Rising competitive pressures.
  • Value destructive acquisition. 
  • Rising cost pressures eroding margins (e.g. more brand or marketing investment required due to competitive pressures).
  • Given the high trading multiples the stock trades at, a disappointing earnings update could see the stock price significantly re-rate lower. 
  • Integration (and therefore synergies) of recent acquisitions underperform market expectations. 
  • Execution risk around Thailand. 

Key Highlights

  • The Board declared a fully franked interim dividend of 10cps, up +11.1% over pcp. 
  • The balance sheet remained strong with ample liquidity with cash increasing +101.5% over 2H21 to $79.8m and net debt of $203M (up +23.7% over 2H21) leading to a leverage ratio of 1.0x, providing the Company with significant financial flexibility to be able to respond rapidly to acquisition opportunities and continue to invest in high returning projects. 
  • Management continued investments in locations to support Truckline and Autobarn networks, expanded geographic footprint with BAP now having a presence in over 1,100 locations throughout Australia, New Zealand and Thailand, and signed 2 acquisitions adding annualised revenue of $50m at mid-single digit EBITDA multiples (pre-synergies).
  • The Board 

Company Profile 

Bapcor Ltd is Australasia’s leading provider of aftermarket parts, accessories and services. The core businesses of BAP are: (1) Trade – Burson Auto Parts is a trade focused parts professional supplying workshops with all their parts and accessories. (2) Retail – Autobarn is the premium retailer of auto accessories and Opposite Lock specializes in 4WD accessory specialists. (3) Independents – supporting the independent parts stores via the group’s extensive supply chain capabilities and through brand support. (4) Specialist Wholesaler – the number 1 or 2 industry category specialists in parts supply programs. (5) Services – experts at car servicing through Midas and ABS.

(Source: BanyanTree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

Stevanto’s Near Term Outlook Foresight Uncertain

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

Business Strategy and Outlook

Stevanato is the market leader in pen cartridges and presterilized vials and holds the number position in prefillable syringes (behind Becton Dickinson). The company is a key supplier in the drug delivery supply chain, and provides drug containment and primary packaging solutions to 41 of the top 50 global pharma companies. Primary packaging is the material that first envelops a drug product, and safe production of drug-delivery packaging is critical for the successful delivery of pharmaceutical products. 

Stevanato aims to increase the percentage of product sales from high value solutions, which refers to products with proprietary intellectual property and greater complexity, such as presterilized drug containment and integrated self-injector pen and wearable devices. The company is prioritizing investment in research and development and broadening its offering through M&A. Capacity expansion is also a key component of Stevanato’s long-term strategic plan, and capital expenditures are likely to remain elevated over the next year or two. Competition for skilled employees is extreme, and future growth will depend on effectively hiring and retaining talent. 

Both the biopharmaceutical and diagnostic segments are expected to benefit from an increased contribution in high value solutions over time, which has been growing 20% year over year and now represents about 23% of consolidated revenue. It is anticipated the ongoing shift to high-value will provide a material tailwind for margin over the next five to 10 years, and also contribute to robust top line growth. It is seen an uncertain near-term outlook for the business, with both positives and negatives related to the ongoing pandemic. Some drug trials have postponed or delayed, leading to lower sales growth for some customers’ drug portfolios. However, this has been mitigated by the pressing need for vaccines and treatments, which has allowed Stevanato to enjoy compound annual top line growth near 25% over the last two years. The company supplies vials and syringes to about 90% of currently approved vaccines.

Financial Strength

Stevanato has a sound financial position.As of September 2021, total cash position in excess of long-term debt on the balance sheet was EUR 154 million. This was mainly related to the firm’s IPO from July 2021, which raised EUR 154 million. In analysts’ view, Stevanato has more than sufficient capital to fund increasing capacity investment, and it can also be seen the potential for tuck-in acquisitions to broaden the firm’s value proposition in the drug delivery supply chain.In the near term, however, Stevanato’s expansion plan is likely to be the focus of capital deployment. Because of a higher level of capital investment, the company reported free cash flow of negative EUR 9.9 million for the third quarter of 2021. It is anticipated significant earnings and cash flow growth over the next few years, and while free cash flow is likely to be close to flat in 2022, it is anticipated free cash flow above EUR 20 million in 2023. It is believed that it’s possible that some additional debt might be needed to cover cash flow needs, but, considering Stevanato’s current low degree of financial leverage, it is not to be concerned with an increase in debt at or below EUR 500 million.

Bulls Say’s

  • Stevanato has room to bring customers up the value chain to higher-value products and services, giving it a lengthy tailwind for earnings growth and margin expansion. 
  • In contrast to peers, Stevanato can use in-house produced glass vials and syringes for integrated selfinjector systems, reducing the number of vendors for customers and providing Stevanato with a possible cost advantage. 
  • As large economies such as India and China implement more stringent pharmaceutical standards, Stevanato stands to become a key cog in the supply chain in those countries.

Company Profile 

Italy-based Stevanato Group is a provider of drug containment, drug delivery and diagnostic solutions to the pharmaceutical, biotechnology and life sciences industries. It delivers an integrated, end-to-end portfolio of products, processes, and services that address customer needs across the entire drug life cycle including development, clinical, and commercial stages. Stevanato’s revenue is geographically diversified, with 60% of sales from Europe, the Middle East and Africa (EMEA), 27% in North America, 10% in Asia-Pacific (APAC), and 3% in South America. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Aecom Poised To Benefit From Favourable Long-Term Tailwinds In Infrastructure and Sustainability Solutions

Business Strategy and Outlook

In recent years, Aecom has transformed its portfolio and focused on growing its professional services business. The firm is in the process of exiting several business lines including fixed-price combined cycle gas power plant construction, at-risk oil and gas construction, and international at-risk construction projects. Furthermore, in January 2020, Aecom completed the sale of its management services business. It is seen Aecom’s transformation favourably and believe that the strategic shift will result in a less volatile and more profitable portfolio.

Furthermore, Aecom has improved its profitability thanks to several recent initiatives, including a $225 million general and administrative cost reduction plan completed in fiscal 2019, real estate consolidation, and a plan to exit over 30 countries to focus on the most profitable markets. It is encouraging that Aecom’s margin expansion thus far and see room for further upside, especially in the international business. It can be noted that there is a significant difference in profitability between the Americas and international segments: the adjusted operating margins on a net service revenue basis are in the mid-teens in the former but only mid-single digits in the latter. Considering an over 1,000-basis-point differential, it is viewed as room for further margin expansion in the international segment, and it is alleged the firm will continue to work to narrow the gap by further simplifying the business and completing its planned 30 country exits to focus on higher-margin markets. 

Analysts remain optimistic about the long-term outlook for Aecom as it is alleged that it’s poised to benefit from favourable long-term tailwinds in infrastructure and sustainability solutions. The company has a strong competitive position in the transportation, water, and environment end markets. As such, it is likely, Aecom is well positioned to capitalize on opportunities created by a growing focus on ESG concerns, including areas such as electrification of transit, clean water, and PFAS.

Financial Strength

At Dec. 31, 2021, the company owed roughly $2.2 billion in long-term debt while holding approximately $1.1 billion in cash and equivalents. Debt maturities are reasonably well laddered over the next few years. Additionally, Aecom can tap into its $1.15 billion revolving credit facility. It is projected that Aecom will generate average annual operating cash flow of approximately $700 million over the next five years. Considering that an investment-grade credit rating can have strategic importance for E&C firms and boost competitiveness in winning new awards, it is likely, Aecom to prioritize paying down its debt balance. In the long-run, it is anticipated the firm to maintain its leverage ratio within management’s target range of 2.0 times to 2.5 times. Additionally, it is alleged that management will continue to allocate excess capital to opportunistic stock repurchases.

Bulls Say’s

  • Thanks to its diversified portfolio, it is anticipated Aecom to take advantage of growth opportunities in sectors with favourable long-term prospects, including transportation and water. 
  • Through its Aecom Capital segment, the firm should be able to capitalize on growth in public-private partnerships (P3), which I said to have some economic moat potential due to customer switching costs. 
  • Following the 2015 acquisition of Hunt Construction, Aecom became the leading nationwide builder of iconic sports arenas, such as the Los Angeles Rams NFL stadium.

Company Profile 

Aecom is one of the largest global providers of design, engineering, construction, and management services. The firm serves a broad spectrum of end markets including infrastructure, water, transportation, and energy. Based in Los Angeles, Aecom has a presence in over 150 countries and employs 51,000. The company generated $13.3 billion in sales and $701 million in adjusted operating income in fiscal 2021

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.