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Technology Stocks

NXT retains a strong medium-term earnings growth outlook from ongoing cloud adoption

Young woman trading stock market by touching.

Investment Thesis

  • Australia is still in the early stages of cloud adoption. More efficient and cheaper broadband following the NBN’s implementation will drive demand from cloud providers for NXT’s assets. 
  • Extremely high-quality collection of sites. 
  • Focus on the premium end where pricing is more stable – Tier 4 gold centres. 
  • NXT has the balance sheet capacity to handle more debt and self-fund expansion through operating cash flow from the base buildings. 
  • Capital intensive nature of the sector provides a high barrier to entry. 
  • Government adoption of cloud and the subsequent need to outsource presents an opportunity.
  • Strong customer ecosystem creates a ‘sticky’ customer base who are unlikely to churn. 
  • National footprint allows Company to scale better than competitors. 
  • Margin expansions highlighting strong operating leverage. 
  • Additional capacity announced. 
  • M&A activity given the global demand for data.

Key Risks

  • No product diversification (NXT only operates data centres). 
  • Significant new supply of data centres by NXT and competitors. 
  • Delays in data centre build or ramp up, impacting earnings growth profile. 
  • Competitive pressures (price discounting by NXT or competitors).
  •  Higher power densities as a result of increasing average rack power utilization in Australia. 
  • Insufficient customer demand to achieve a satisfactory return on investments. 
  •  Failure to obtain sufficient capital on favourable terms may hinder NXT’s ability to expand and pursue growth opportunities. 
  •  Lease risk (NXT does not own the land or building where its data centres are situated).

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Data centre services revenue of $144.5m was up +19%. 
  •  Underlying EBITDA of $85.0m, up +29%. 
  • Operating cash flow increased +9% to $69.5m. 
  • NPAT of $10.3m was a significant improvement from the $17.8m net loss in the pcp. 
  • NXT retained a strong liquidity position of $2.1bn, including undrawn debt facilities of $1.4bn at 1H22-end. Gearing (Net debt / (net debt + equity) increased to 16.6% from 7.3%. 
  •  Contracted utilisation increased 10.0MW, or +14% to 81.0MW. 
  • Customer numbers grew by 144, or +10% to 1,569.
  • Interconnections was up 1,968, or +14% to 15,879, and now equates to 7.3% of recurring revenue.

Company Description

NEXTDC Limited (NXT) is a Data-Center-as-a-Service (DCaaS) provider offering a range of services to corporate, government and IT services companies. NXT has a total of five data centers located in major commerce hubs in Australia, with three more due to be completed within the next 2 years. These facilities are network-neutral, meaning they operate independently of telecommunication and IT service providers. Currently NXT has a total of 34.7 MW built for data and serving housing, with a target to reach 104.1MW by the end of 1H18.

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

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

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate. Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

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

Categories
Dividend Stocks

Mizuho expanded its overseas business quite rapidly in the first half of the past decade

Business Strategy & Outlook

Mizuho Financial Group is one of Japan’s three largest banking groups, with a 6.9% share of domestic loans and 8.5% share of deposits as of March 2022. In Japan, the environment for banks has been tough for years and to remain so. A long-running deflationary environment in the country led to persistently low demand for loans, with the loan/deposit ratio having declined from 74% in 2000 to around 56% at present. The debt/equity ratio for Japan’s approximately 1 million business corporations declined from more than 2 times prior to the late 1990s to a reasonably healthy 0.66 times in 2019 as borrowers prioritized paying down existing debt rather than taking out new loans for investment, but credit costs may increase moderately in the coming years after many corporations increased their borrowing in 2020 and as the pandemic affected some firms’ business models. Mizuho expanded its overseas business quite rapidly in the first half of the past decade, with overseas loans rising from 12.6% of total loans in March 2011 to 29.4% by March 2016. Mizuho has since moderated the overseas growth in order to better manage risks and conserve capital, and overseas loans comprised 33.8% of total loans as of March 2022. Compared with its Japanese megabank rivals, which have taken control of local banks in the U.S. or Southeast Asia, Mizuho’s only such investment overseas is a 15% stake in Vietnam’s Vietcombank and a 7.5% stake in Vietnamese digital-payment firm M-Service. Almost all of its overseas operations are done through the main Mizuho entities (Mizuho Bank, Mizuho Trust, and Mizuho Securities). Mizuho also lacks the large consumer finance, credit card, and leasing operations of its two rivals, leaving it dependent on banking, securities and asset management alone for future returns. The need for massive expense reductions is thus even more important for Mizuho’s future profitability than it is for its two megabank rivals. However, the lack of existing businesses could ironically help Mizuho adapt more flexibly than its rivals if digitalization increasingly disrupts businesses such as credit card payments.

Financial Strengths

As of September 2022, Mizuho Financial Group’s common equity Tier 1 capital ratio was 11.4%, slightly below the average for global systemically important banks. Mizuho’s density of risk-weighted assets to total assets is also lower than that of many other G-SIBs, particularly those headquartered in the U.S., and its ratio of Tier 1 capital to total leverage exposure of 4.22% is well below the G-SIB average of around 6.0%. This presents a constraint on Mizuho’s ability to increase profits by expanding balance sheet size. Instead, the group has no choice but to improve efficiency with the current size of assets, or preferably with a smaller balance sheet. Mizuho’s liquidity coverage ratio of 126% compares with the G-SIB average of 134%. The LCR does not fully distinguish between currencies, and while Japanese banks’ yen liquidity is very strong, they depend on access to U.S. dollar funding for their large amount of U.S. dollar assets. Foreign-currency deposits of USD 227 billion covered 77% of Mizuho’s nonyen loans of USD 296 billion as of September 2022. For the remainder, Mizuho has issued large bonds in U.S. dollars and euros through the holding company, as well as bonds in CNY and AUD through Mizuho Bank.

Bulls Say

  • Mizuho has outlined aggressive cost-cutting plans that could surprise market expectations to the upside.
  • After years of system troubles and long delays in integrating its predecessor banks, Mizuho has left expectations at such a low level that there is room for upside surprise as long as the group just performs reasonably well.
  • Mizuho’s lack of a strong consumer finance or credit card business could ironically help it adapt more flexibly to disruptive innovation in this area.

Company Description

Mizuho Financial Group is roughly tied with megabank peer Sumitomo Mitsui Financial Group for the status as Japan’s second largest bank after Mitsubishi UFJ Financial Group. As of March 2021, Mizuho’s market share of domestic loans was 6.9%, compared with 7.0% for SMFG and 8.3% for MUFG. In Japan, Mizuho has more of a corporate focus than SMFG, which has a larger retail business. Its overseas weighting is slightly smaller than that of MUFG. Unlike its two Japanese megabank peers that own foreign banks outright or hold non controlling stakes in local banks overseas, Mizuho expanded in recent years beyond its traditional Japanese borrowers, mainly through its core banking and securities units, focusing on the financing needs of global multinational corporations.

(Source: Morningstar)

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

Mineral Resources Ltd through Lockyer Deep will get a unique opportunity to secure its own energy supply

Investment Thesis

  • Strong competitive position with the company being one of world’s top five lithium producers, Australia’s fifth largest iron ore producer, largest landholder of onshore gas acreage in the Perth and Carnarvon Basins and world’s largest crushing contractor. 
  • Strong and solid fundamentals with robust lithium and iron ore demand and prices to persist.
  • High quality assets operated by a solid management team with appropriate expertise. 
  • Strong track record since 2006 ASX listing with the company growing total assets 50x to $7.8bn (+30% p.a. growth), delivering 21% p.a. ROIC, generating $7.5bn in underlying EBITDA (+25% p.a. growth) and not undertaking any dilutive capital raise. 
  • Strong shareholder returns with the company delivering 31% p.a. total shareholder returns since 2006 including +20% p.a. dividend growth. 
  • Solid balance sheet. 
  • Improved efficiency amid successful restructuring of the company into four operating pillars, Mining Services, Iron Ore, Lithium and Energy, with each operating as a separate business under separate management. 

Key Risks

  • Commodity price volatility. 
  • Deterioration in global iron ore supply & demand equation.
  • Unfavorable movements in AUD/USD.
  • Adverse weather impacting operations and earnings.
  • Lack of exploration success.
  • Metal processing issues due to issues with the metallurgical processing equipment.
  • Production delay or unscheduled site shutdown.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Revenue declined -8% y/y to $3.42bn, with Iron Ore down – 35% y/y as record iron ore exports of 19.2Mt were more than offset by lower realised prices amid sharpest fall in iron ore price in history, Mining Services up +22% y/y driven by record production volumes of 274Mt (up +10% y/y) and strong business momentum with five new contracts awarded and three contracts renewed, and Lithium up +509% y/y driven by higher prices. 
  • Underlying EBITDA declined -46% y/y to $1bn, with earnings negatively impacted in 1H22 by the steep decline in iron ore prices and widening discounts before stabilising in 2H22, however, with record lithium prices, first earnings from conversion of Mt Marion spodumene concentrate into lithium hydroxide and record growth in the Mining Services division, 2H22 performance remained strong. Controllable underlying EBITDA was up +9% y/y (refer to Figure 2)
  •  Operating cash flow declined -79% y/y to $344m, impacted by an increase in working capital relating to the restart of Wodgina, the increase in lithium pricing causing receivables to increase, and first earnings from conversion of the company’s spodumene concentrate into lithium hydroxide. 
  • Capex increased +7% y/y to $800m with 54% being growth capex, 40% sustaining capex and 6% exploration. 

Company Description

Mineral Resources Ltd (MIN), based out of Perth is focused on contractor crushing, mining services, iron ore and lithium operations. The company is the world’s largest crushing contractor with crushing contracts with some of the world’s largest mining companies in iron ore, gold and lithium operations, as well as its own operating assets.

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

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

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

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

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

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

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

Categories
Technology Stocks

Marvell is the leader in DPUs and PAM-4 optics and the clear second in enterprise and cloud Ethernet

Business Strategy & Outlook

Marvell Technology has emerged as a strong competitor in the networking chip market following a multiyear business shift to acquisitions, divestitures, and organic development to focus on high-growth cloud, 5G, and automotive markets. Between data processing units, or DPUs, optical interconnect, and Ethernet solutions, Marvell has one of the broadest networking silicon portfolios in the world, and it is primed to steal market share from incumbent Broadcom with bleeding-edge technology. Marvell has exited its low-margin legacy markets of consumer hard disk drives and Wi-Fi chipsets to focus on its networking portfolio and used the acquisitions of Cavium, Avera, Aquantia, Inphi, and Innovium to expand out of its enterprise market niche into the rapidly growing data center and 5G markets. Marvell is the leader in DPUs and PAM-4 optics and the clear second in enterprise and cloud Ethernet. Marvell will use a hefty research and development budget to keep up with heavyweights like Nvidia, Intel, and Broadcom and set up top-line growth over the next 10 years, but it is less certain about its ability to earn excess returns on its investment while doing so. The firm hasn’t carved out an economic moat yet and are waiting to see it prove an ability to achieve growth and margin expansion organically.

Marvell’s recent financial history has been choppy as a result of CEO Matt Murphy’s aggressive overhaul of the business’ focus. The reorganization is squarely in the firm’s rearview mirror now and forecast midteens sales growth and immense margin expansion over the next 10 years. The trends toward disaggregated networks and merchant silicon, as well as 5G and data center build outs, will be secular tailwinds for Marvell. The combination of 2021 acquisitions Inphi and Innovium under Marvell’s umbrella will create a dangerous combination to Broadcom in the high-performance switching arena and enable share gains. Marvell has the right portfolio to invest aggressively in organic growth, but don’t rule out further acquisitions to bolster its competitiveness and enter adjacent markets.

Financial Strengths

Marvell to focus on deleveraging with its free cash flow, though there are no more acquisitions. As of Jan. 29, 2022, the firm carried $614 million in cash and $4.5 billion in total debt—largely taken on to acquire Inphi. Despite taking on significant debt in fiscal 2022, Marvell closed the fiscal year within its debt-to-adjusted EBITDA target range, at 1.6 times. Marvell is to stay leveraged but to pay down debt as it matures. The firm’s free cash flow generation to ramp up toward $2 billion a year by fiscal 2026, up from $650 million in fiscal 2021, as it exacts material operating leverage with top-line growth. Marvell will prioritize maintaining its dividend and won’t have to deleverage to fund maturing notes. Marvell also has a $750 million revolver available if it encounters a sudden liquidity crunch.

Bulls Say

  • Marvell has best-of-breed data processing units and optical interconnect products that should allow it to benefit from the rapidly growing cloud and 5G markets.
  • The combination of Inphi and Innovium under the Marvell umbrella could give it a technological advantage to Broadcom in high-performance networking.
  • Marvell to exact significant operating leverage as it incorporates acquisitions and adds volume to the top line.

Company Description

Marvell Technology is a leading fabless chipmaker focused on networking and storage applications. Marvell serves the data center, carrier, enterprise, automotive, and consumer end markets with processors, optical interconnections, application-specific integrated circuits (ASICs), and merchant silicon for Ethernet applications. The firm is an active acquirer, with five large acquisitions since 2017 helping it pivot out of legacy consumer applications to focus on the cloud and 5G markets.

(Source: Morningstar)

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

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

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

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

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

Categories
Dividend Stocks

Rayonier’s New Zealand business is the firm’s largest timber segment by revenue

Business Strategy & Outlook

Rayonier is the second largest timberland real estate investment trust, or REIT, in North America, managing roughly 1.8 million acres in the southern U.S., 500,000 acres in the Pacific Northwest, and over 400,000 acres in New Zealand. As a REIT, Rayonier distributes its REIT income to shareholders without having to pay corporate level incomes taxes. Cash flow is generated through timber harvesting and the sale of land that it determines has higher value than if it remained in its portfolio. Unlike some of its competitors, Rayonier is a pure-play REIT. The firm generates most of its revenue from the sale of timber and does not produce wood or paper products. While some of its operations are subject to U.S. federal and state income taxes (New Zealand business and log trading), a majority of Rayonier’s income is tax-exempt under its REIT status.

A significant majority of Rayonier’s timberland acreage (70%) is located in the southern region of the U.S., but the firm derives a comparable amount of revenue in each of its regions. In its southern region, roughly two thirds of sales volume are from pulpwood timber, which is used in a variety of pulp and paper products. The remaining one third of volume is higher value sawtimber and serves general construction and homebuilding end markets. Rayonier’s Pacific Northwest timber business sells sawtimber to domestic customers and exports timber to Pacific Rim markets. Homebuilding and general construction are the main end markets for Rayonier’s Pacific Northwest operation. Rayonier’s New Zealand business is the firm’s largest timber segment by revenue. It operates as a joint venture, with Rayonier owning a 77% controlling interest in the subsidiary. The majority of its timberland portfolio in New Zealand is composed of sawtimber that serves the construction end market. Rayonier’s New Zealand operations reduce the firm’s reliance on North American construction as much of its production is exported to China, South Korea, and India.

Financial Strengths

Rayonier has a sound capital structure, and its consistent free cash flow generation should easily support its debt-service requirements and future capital allocation decisions. The firm has historically operated with moderate amounts of leverage. Net debt/adjusted EBITDA dropped below 3.0 times in 2021, but it will return to historical levels as lumber prices retreat from all-time highs and the firm’s EBITDA normalizes. The firm has roughly $1.3 billion in outstanding debt with staggered maturities through 2031, but its next maturity isn’t until 2025 when roughly $24 million is due. Rayonier’s outstanding debt is dwarfed by its substantial timberland portfolio. Its strong asset base should provide the firm with ample access to capital markets should it need to raise additional capital for future acquisitions or capital allocation decisions. Going forward, the firm to continue evaluating timberland acquisitions in the United States and New Zealand that it believes will add value to its timberland portfolio.

Bulls Say

  • The vast majority of Rayonier’s timberland is located in the southeastern region of the U.S. It is the most popular region for sawmill capacity increases and will provide a strong avenue for timber volume and price growth.
  • Rayonier’s New Zealand business reduces the firm’s reliance on North American construction markets and will enable the firm to capitalize on rising wood demand in Asia.
  • Rayonier’s timberland is set to become increasingly valuable as alternative uses for its land in the U.S. become more popular.

Company Description

Rayonier Inc is a real estate investment trust. The company owns and manages timberland. It derives revenue from the following core business segments: Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate, and Trading. The majority of revenue is earned from the New Zealand timber segment. It owns land in the United States and New Zealand.

(Source: Morningstar)

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

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

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

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

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

Categories
Dividend Stocks

MFG saw FY22 revenue decline -8% yy, driven by material client outflows and consistent underperformance of the flagship global fund

Investment Thesis

  • Principal Investments could grow to become a meaningful contributor to group performance over the medium-to-long term.
  • MFG no longer trades at a significant premium to its peer-group post the recent derating.
  • Acquisitions could pave growth runways, helping to ease the Company’s fund capacity constraints.
  • Average base management fee (bps) per annum (excluding performance fee) continues to be stable but there are risks to the downside from pressures on fees (which is an industry trend not specific to MFG alone).
  • Continued strong investment performances, especially in the global and infrastructure funds.
  • Growing levels of funds under management.
  • New strategies could significantly increase the addressable market and help sustain earnings growth.

Key Risks

  • Decline in fund performance. 
  • Risk of potential funds outflow – both retail and institutional (loss of a large mandate). 
  • Execution risk with the acquisitions. 
  • Significant key man risk around Hamish Douglass and key management or investment management personnel. 
  • New strategies fail to add meaningful earnings to the group. 

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Revenues declined -8% to $609.1m, driven by -7% decrease in management fee revenue as a result of a -9% decrease in average FUM to $94.3bn and -62% decline in performance fees, partially offset by +274% increase in other revenue and income driven by distribution income of $17.6m, realised capital gains of $19.4m and net FX gain of $3.5m. 
  • Expenses increased +20% to $127.1m and came in between management’s guidance range of $125-130m (guidance range remains unchanged for FY23), equating to cost to income ratio (excluding performance fees) of 21.3%, up +450 bps, primarily driven by +25% growth in employee expenses and +45% growth in marketing expenses. 
  • Statutory NPAT increased +44% to $383m, however, adjusted NPAT (adjusted for strategic, non-recurring, non-cash or unrealised items) was down -3% to $399.7m. 
  • Strong balance sheet maintained with no debt and $963.3m in cash, financial assets and investments in associates, up +7%. 
  • FUM declined -46% to $61.3bn, split between global equities (54%), infrastructure equities (33%) and Australian equities (13%), driven by investment losses of $2.3bn, net outflows of $49.5bn and cash distributions (net of reinvestment) of $0.8bn.

Company Description

Magellan Financial Group Ltd (MFG) is a specialist funds management business. MFG’s core subsidiary, Magellan Asset Management Ltd, manages funds across its global equities and global listed infrastructure strategies for retail, high net worth and institutional investors.

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

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

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

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

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

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

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

Categories
Technology Stocks

The 2020 merger with Vodafone Australia is one-way TPG Telecom is trying to limit the impact of the NBN

Business Strategy & Outlook

TPG Telecom is grappling with structural changes in the Australian telecommunications industry. Rollout of the national broadband network, or NBN, and take-up of high-traffic products such as internet protocol television and video streaming, will increase the demand for broadband and backhaul capacity. However, the NBN will also force TPG Telecom to become a reseller, impacting its consumer broadband margins. TPG Telecom’s price-leader strategy still sees the company delivering solid subscriber and market share performance. Product bundling has also become a key segment in the market, with all players using broadband as a lead-in product and cross-selling voice, mobile, pay-TV, and digital streaming services. The ownership of submarine cable between Australia and Guam offers the group broader cost advantages. Pricing is mainly a function of demand and supply, available capacity, and the length of cable. 

Economies of scale play a large part in pricing where costs are measured on per unit of volume. A longer cable results in increased material and maintenance costs, meaning cost per unit is higher. Cables with large capacity reduce costs per unit, as costs such as fixed construction and rollout costs are spread across a larger base. A sharp price decline in international traffic remains a risk. Contracts are structured in typical 15-year leases, providing some certainty in revenue. Clients are allocated a fixed bandwidth and have the right to on-sell capacity. The 2020 merger with Vodafone Australia (the third-ranked mobile player in the country) is one-way TPG Telecom is trying to limit the impact of the NBN. Mobile offers a critical strategic path to future-proof the group in the face of onslaught from the NBN. The government entity is already wreaking havoc on the narrow-moat-rated group’s retail fixed-line broadband and could even potentially impact the lucrative enterprise segment.

Financial Strengths

TPG Telecom’s financial health is solid. Historically, management has used debt to finance acquisitions and demonstrated a capacity to pay it down in due course. As at the end of June 2022, and factoring in the AUD 890 million proceeds from the mobile towers’ sale, net debt/EBITDA was 2.0 times, below the covenant limit of 3.5 times.

Bulls Say

  • Cross-selling opportunities remain for both consumer and corporate markets
  • The merger with Vodafone Australia increases the scale of the combined entity and allow it to better compete against Telstra and Optus in the Australian market.
  • Further rollout of its fiber network also boosts growth, while incremental cost from an additional user is small.

Company Description

TPG Telecom is Australia’s third-largest integrated telecom services provider. It offers broadband, telephony, mobile and networking solutions catering to all market segments (consumer, small business, corporate and wholesale, government). The group has grown significantly since 2008, both via organic growth and acquisitions, and in July 2020 merged with Vodafone Australia. It owns an extensive stable of infrastructure 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 are not liable for any unintentional errors in the document.

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

Categories
Technology Stocks

Enphase has generated approximately 80% of its revenue from the United States and has only served the residential market

Business Strategy & Outlook

Enphase is the world leader in micro-inverter technology for distributed solar systems. The inverter is often referred to as the brains of a solar system. Its purpose is to (1) convert direct current produced by solar panels into alternating current used by households/grid; and (2) optimize energy production. Broadly, there are three kinds of inverters serving the solar market: string inverter, central inverter with power optimizer, and microinverters. Simple string inverters typically serve the utility-scale market, while power optimizers and microinverters are more prevalent in rooftop markets. Enphase is in the midst of a transition from a microinverter company to selling home energy solutions. Enphase targets to create a one-stop shop for solar installers: microinverters, energy storage, EV charging, and digital services for installers and homeowners. This strategy is impressive as it leverages its existing position with installers to expand its total addressable market while maintaining the company’s core end market of distributed generation. Additionally, it aligns well with the macro view of increasing distributed generation and electrification of demand.

Furthermore, the company is focused on diversifying its end markets by geography and market segment. In recent years, Enphase has generated approximately 80% of its revenue from the United States and has only served the residential market. The company is looking to build on success domestically to expand internationally, notably in Europe, where the competitive landscape tends to be more fragmented. Enphase plans to introduce a microinverter for the small commercial segment in early 2023, its first product outside the residential market.

Financial Strengths

Following a period of distress in the 2017-time frame, the company has been instilled with a disciplined financial model under a new CEO and CFO. Enphase pursues a capital light strategy and seeks to avoid entering into long-term contracts with suppliers to ensure flexibility. The company has a heavily equity weighted capital structure in line with peers. Current outstanding debt of approximately $1 billion consists of convertible notes due in 2026 and 2028. 

Bulls Say

  • Enphase commands industry-leading gross margins and ROICs based on its high-tech product offering.
  • Enphase serves a growing rooftop solar market with an expanding total addressable market as more consumers adopt solar + storage.
  • Potential policy incentives to address climate change have the ability to meaningfully increase annual solar installations.

Company Description

Enphase Energy is a global energy technology company. The company delivers smart, easy-to-use solutions that manage solar generation, storage, and communication on one platform. The company’s micro-inverter technology primarily serves the rooftop solar market and produces a fully integrated solar-plus-storage solution. Geographically, it derives a majority of revenue from the United States.

(Source: Morningstar)

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

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

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

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

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

Categories
Technology Stocks

Lear is well positioned with seating and electrical architecture to capitalize on global growth in premium vehicles

Business Strategy & Outlook

Lear’s revenue will grow in excess of increases in annual worldwide light-vehicle production. The company is well-positioned to capitalize on several trends in the global automotive industry, including automakers’ focus on high-quality interiors, premium-vehicle segment growth, the proliferation of automotive electronics, and battery electric vehicles. Lear competes in the markets for vehicle seating and automotive electrical and electronic architecture. A culture of continuous innovation, high switching costs for customers, highly integrated engineering relationships with customers, and lengthy vehicle programs provide Lear with sticky market share. The premium-vehicle segment leads the way in the proliferation of electrical circuits, electronic devices, and digitalization. All-electric and electric hybrid vehicles also contain higher power-management content, the production of which is being driven by more stringent fuel economy and emissions regulations. Additionally, premium-vehicle seating contains more features and uses higher-quality materials, commanding higher pricing. Lear is the global leader in premium seating.

Vehicle propulsion and dynamics, which at one time were mechanically, hydraulically, and vacuum-driven, have become electronic, requiring electrical power, computer processing, and signal processing to communicate and interact with other vehicle systems. Hybrid and all-electric powertrains require more robust electrical architecture to support the power consumption of the battery-driven electric motor. Vehicle autonomy exacerbates the need for more complex electrical and electronic architectures. Lear is the number-two company in the global automotive seating market, but management believes it is the global leader in luxury- and performance-vehicle seating. The company has the fourth-largest market share in the electrical segment. Even though there is limited synergy between the two sides, Lear is well positioned with seating and electrical architecture to capitalize on global growth in premium vehicles, bolstering the thesis that revenue should outpace global growth in worldwide vehicle production.

Financial Strengths

The company maintains a solid balance sheet and liquidity that, relative to many other parts suppliers, makes for strong financial health. From a credit perspective, the company did not reduce debt outstanding but made $705 million worth of share repurchases in 2018. Even so, Lear’s capital structure as slightly underleveraged. Given the company’s ability to generate solid free cash flow, Lear could take advantage of the benefits of modestly higher financial leverage without incurring the pitfalls of excessive debt in a cyclical industry. Lear entered and exited bankruptcy protection in 2009, prior to which, the company averaged total debt/total book capital of around 65%. Using the Morningstar method of calculating total debt/total capital where capital includes the equity market capitalization instead of the book value of equity, the pre-bankruptcy average was 46%. Since 2011, Lear has maintained much lower leverage with a 31% book total debt/total capital ratio and a 16% total debt/Morningstar total capital ratio. Using total debt minus cash to arrive at a net debt/total capital ratio, the average is 0.4% due to the company’s relatively large cash position. Lear funds its working capital needs with its free cash flow, cash balance, and revolving line of credit. As of the end of 2021, total liquidity including cash and available revolving credit facility was roughly $3.3 billion ($1.3 billion cash and $2.0 billion revolver availability). In the third quarter of 2021, Lear amended its revolver, increasing it to $2.0 billion from $1.75 billion and extending the maturity to October 2026 from August 2024. 

Bulls Say

  • Lear’s above-industry growth rates are supported by a growing global premium-vehicle segment and increasing penetration of automotive electrical and electronic content.
  • A culture of continuous innovation at Lear enables regular and consistent product and process development, commercializing technology that generates solid margins and returns on invested capital.
  • Automakers’ growing use of common architectures benefits Lear because of its global footprint.

Company Description

Lear designs, develops, and manufactures automotive seating and electrical systems and components. Seating components include frames and mechanisms, covers (leather and woven fabric), seat heating and cooling, foam, and headrests. Automotive electrical distribution and connection systems and electronic systems include wiring harnesses, terminals and connectors, on-board battery chargers, high voltage battery management systems, high voltage power distribution systems, domain controllers, telematics control units, gateway modules, vehicle positioning for automated and autonomous driving, embedded control software, cloud and mobile device software and services, and cybersecurity.

(Source: Morningstar)

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

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

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

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

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

Categories
Technology Stocks

Lam is poised to grow faster than the overall equipment industry, as it can capture a larger share of the market with technically superior tools

Business Strategy & Outlook

Lam Research is a major vendor of semiconductor fabrication tools. The firm is the leader in dry etch, a critical step in the chip making process where material is selectively removed. Lam has a wide economic moat as a result of cost advantages and intangible assets related to equipment design. Lam’s leadership position creates scale advantages that fuel research and development spending at levels only Applied Materials and Tokyo Electron can match. At the end of 2021, Lam had an installed base of 75,000 units, up from 40,000 in 2015. This large installed base creates stickiness and offers Lam an intimate look into problems faced by chipmakers, providing valuable information it can use to implement solutions and additional capabilities in future tools. Chipmakers that have continued along the trajectory prescribed by Moore’s law have endured significant challenges in terms of cost and complexity. Equipment providers are vital to making the pursuit more economical via advanced chip manufacturing tools. Lam has benefited from the sharp rise in etch, deposition, and clean steps required as a result of major inflections, including FinFET transistors and planar to 3D NAND, that feature multiple patterning and vertical layers well suited for Lam’s advanced etch and deposition offerings. 

Consequently, Lam is poised to grow faster than the overall equipment industry, as it can capture a larger share of the market with technically superior tools. The volatile nature of demand for semiconductors directly affects the cyclicality of the equipment market. Lam, along with its peers, has benefited from an increase in service revenue in recent years, which will mitigate the volatility of equipment orders. Specifically, maintenance and engineering costs and spare parts are tied into service contracts that deliver a stable revenue stream distinct from tool purchases. As traversing Moore’s law becomes increasingly difficult, the service segment will grow as chipmakers increase their reliance on field service engineers from Lam and its peers, while also helping entrench vendors’ installed base of tools at customer facilities.

Financial Strengths

Lam is in a solid financial position. As of March 27, 2022, the firm had $4.2 billion in cash and equivalents, versus $5.0 billion in long-term debt. The firm typically keeps a substantial cash position on its balance sheet, which is appropriate for chip equipment firms. During cyclical downturns, the cash cushion allows Lam to continue investing heavily in research and development in order to maintain its leading technology and competitive positions.

Bulls Say

  • Lam is a leader in the dry etch and deposition markets and counts major chipmakers, such as Samsung Electronics and Taiwan Semiconductor Manufacturing, as customers.
  • Lam has achieved superior share gains in recent years due to its strong equipment offerings in etch and deposition, combined with the 3D NAND and multiple patterning inflections that require more of those particular tools.
  • Demand is strong for advanced etch and deposition tools, because they help chipmakers continue down the path prescribed by Moore’s law. 

Company Description

Lam Research manufactures equipment used to fabricate semiconductors. The firm is focused on the etch, deposition, and clean markets, which are key steps in the semiconductor manufacturing process, especially for 3D NAND flash storage, advanced DRAM, and leading-edge logic/ foundry chipmakers. Lam’s flagship Kiyo, Vector, and Sabre products are sold in all major geographies to key customers such as Samsung Electronics, Micron, Intel, and Taiwan Semiconductor Manufacturing.

(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.