Tag: Street Talks

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Dividend Stocks

Franklin has used acquisitions to alter its product portfolio to the point where equities now account for just 32% of AUM

Business Strategy & Outlook

While the combination of rising interest rates and an equity market selloff has negatively affected Franklin Resources’ assets under management, it is cautiously optimistic about the firm over the near to medium term. Franklin came into fiscal 2022 (ending September) with $1.530 trillion in AUM, which rose to a record $1.578 trillion at the end of December 2021, but market losses of more than $150 billion and outflows of more than $35 billion since the start of calendar 2022 left the company with $1.388 trillion in managed assets at the end of August. So far, market losses have had a bigger impact on AUM than fund flows, with Franklin reporting a 9.2% (13.8%) market loss for its managed assets during its fiscal third quarter (last two fiscal quarters). The firm’s investment performance has hewed close to benchmark returns for both its equity and fixed-income operations the past couple of quarters, with the better diversification of its product portfolio since the Legg Mason acquisition (as well as the addition of several alternative asset managers to the platform the past couple of years) helping the company to hold on to more assets than its equity-heavy peers.

There’s been big proponents of consolidation among the U.S.-based asset managers, expecting firms to pursue scale within existing product sets, as well as pursue nonaffected investment products like alternative assets, as a means of offsetting the impact of fee and margin compression being driven by the growth of low-cost passively managed products. During the past several years, Franklin has used acquisitions to alter its product portfolio to the point where equities now account for just 32% of AUM, while 38% is invested in fixed-income products, 10% in multi-asset/balanced funds, 16% in alternative assets, and 4% in money market funds. Although this shift in Franklin’s product mix to keep margins from deteriorating in the face of industry wide fee compression and rising costs (necessary to improve investment performance and enhance product distribution), near-term organic growth will struggle to stay positive in the face of current market headwinds.

Financial Strengths

Franklin entered fiscal 2022 with $3.2 billion in debt on a principal basis (including debt issued/acquired as part of the Legg Mason deal): $300 million of 2.8% notes due September 2022, $250 million of 3.95% notes due July 2024, $400 million of 2.85% notes due March 2025, $450 million of 4.75% notes due March 2026, $850 million of 1.6% notes due October 2030, $550 million of 5.625% notes due January 2044, and $350 million of 2.95% notes due August 2051. The firm also has a $500 million revolving credit facility that remains untapped. At the end of June 2022, Franklin had $5.8 billion in cash and investments on its books. More than half of these types of assets have traditionally been held overseas, with as much as one third of that half used to meet regulatory capital requirements, seed capital for new funds, or supply funding for acquisitions. Assuming Franklin closes out the year in line with the expectations, and rolls over its debt due September 2022, it will enter fiscal 2023 with a debt/total capital ratio of 22%, interest coverage of close to 20 times, and a debt/EBITDA ratio (by the calculations) of 1.5 times. Franklin has generally returned excess capital to shareholders as share repurchases and dividends. During the past 10 fiscal years, the firm repurchased $7.4 billion of common stock and paid out $7.1 billion as dividends (including special dividends). While Franklin’s current payout ratio is slightly lower than the firm’s 40% average payout (when excluding special dividends) the past five years, it is expected that only mid-single-digit annual increases in the dividend going forward. Franklin spent $208 million, $219 million, and $755 million buying back 7.3 million, 9.0 million, and 24.6 million shares, respectively, during fiscal 2021, 2020, and 2019. With the company potentially paying down debt over the next several years, share repurchases will likely be limited in the near term.

Bulls Say

  • Franklin Resources is one of the 20 largest U.S.-based asset managers, with more than two thirds of its AUM sourced from domestic clients. It is also the fifth-largest global manager of cross-border funds.
  • The purchase of Legg Mason has lifted Franklin’s AUM closer to $1.5 trillion, hoisting it into the second-largest tier of U.S.-based asset managers, which includes firms like Pimco, Capital Group, and J.P. Morgan Asset Management.
  • Franklin maintains thousands of active financial advisor relationships worldwide and has close to 1,000 institutional client relationships.

Company Description

Franklin Resources provides investment services for individual and institutional investors. At the end of July 2022, Franklin had $1.430 trillion in managed assets, composed primarily of equity (32%), fixed-income (38%), multi-asset/balanced (10%) funds, alternatives (16%) and money market funds (4%). Distribution tends to be weighted more toward retail investors (49% of AUM) investors, as opposed to institutional (49%) and high-net-worth (2%) clients. Franklin is also one of the more global firms of the U.S.-based asset managers been covered, with more than 35% of its AUM invested in global/international strategies and 25% of managed assets sourced from clients domiciled outside 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
Dividend Stocks

Invesco Will See Market Losses and Outflows as Long as Equity and Credit Markets Are Declining

Business Strategy & Outlook

Invesco had for a long time been a top pick for us among the U.S.-based asset managers one can have generated solid organic AUM growth (of 1.7% annually on average during 2008-17) and having a broadly diversified platform (including a niche ETF product portfolio with Power Shares ETF operations, which were rebranded as Invesco ETFs in 2018), despite generating below-average levels of operating profitability (primarily because of the costs associated with its more retail-centric distribution platform). The confidence in the firm has started to waver, though, in early 2018 when management lowered expectations for its fee realization rate, which had a dampening effect on the company’s ability to lift its margins. The company also bungled the messaging on its late 2018 purchase of Oppenheimer Funds, which should have improved its organic growth, realization rate, and profitability profiles. None of which happened, though, as the firm’s organic growth profile deteriorated (with Invesco posting negative 4.5%, 3.2%, and 1.8% growth rates in 2018, 2019, and 2020, respectively), the firm’s realization rate fell from 0.416% in 2017 to 0.371% in 2020 (and 0.347% in 2021), and adjusted GAAP operating margins declined from 26.8% in 2017 to 20.4% in 2020 (and while margins did bounce back to 25.0% last year, they are expected to stay in a 20%-22% range during 2022-26). 

About the same time that management was lowering expectations for fees, price/earnings multiples for the group started to bifurcate between the haves—firms like BlackRock, T. Rowe Price, and Cohen & Steers that were capable of generating above-average organic AUM growth and maintaining above-average margins—and the have-nots—firms like Invesco, Franklin Resources, Affiliated Managers Group, and Janus Henderson Group—that were expected to struggle to do both or that had fallen into a pattern of poorer performance and positioning. While cautiously optimistic about Invesco over the past year, though, as the firm has put up a nice string of positive flows, the market downturn, ongoing fee compression, and rising costs are going to keep a lid on margin gains in the near to medium term.

Financial Strengths

Invesco entered 2022 with $2.1 billion of debt on its books, composed of $600 million of 3.125% notes due November 2022, $600 million of 4.000% notes due January 2024, $500 million of 3.75% notes due January 2026, and $400 million of 5.375% notes due November 2043. The company also has a $1.25 billion floating-rate credit facility (maturing in April 2026) at its disposal. During the second quarter, the firm paid down its debt due in November 2022, closing out the period with $185 million outstanding on its credit facility. Should the firm close out the year with results, it would enter 2023 with a debt/total capital ratio of 9%, a debt/EBITDA ratio of 1.2 times, and an EBITDA interest coverage ratio of just over 15 times. While Invesco has traditionally dedicated much of its excess cash to seed investments, dividends, and share repurchases, the issuance of $4.0 billion of 5.9% perpetual noncumulative preferred stock as part of its financing of the 2018-19 Oppenheimer Funds acquisition is eating up cash, as the firm pays out $236 million annually to service the interest obligation. The suspect that the size and scope of the Oppenheimer Funds deal means that future deals are likely to be smaller, bolt-on acquisitions aimed at plugging holes in the firm’s product mix and/or geographic reach. After cutting the company’s quarterly dividend by 50% to $0.155 per share at the start of the second quarter of 2020, the firm raised it 10% to $0.17 per share during 2021 and then by another 10% in early 2022 to $0.1875 per share. Even so, one doesn’t expect the dividend to return to pre-pandemic levels for some time, with the firm likely to maintain a payout ratio of 30%-35% longer term. One also does not expect much in the way of share repurchases in the near term unless the shares are trading at a significant discount to intrinsic value.

Bulls Say

  • The Oppenheimer Funds deal lifted AUM closer to the $1.5 trillion mark, putting Invesco on a slightly better footing with industry giants like BlackRock and Vanguard, each of which oversees more than $5 trillion. 
  • Invesco’s organic AUM growth had turned positive for more than a few quarters, with the firm picking up $12.8 billion in net inflows on average quarterly from the third quarter of 2020 to the first quarter of 2022. 
  • Oppenheimer Funds’ slightly higher AUM realization rate should help offset some of the impact of industry wide fee compression on Invesco’s top line.

Company Description

Invesco provides investment-management services to retail (65% of managed assets) and institutional (35%) clients. At the end of July 2022, the firm had $1.449 trillion in assets under management spread among its equity (48% of AUM), balanced (5%), fixed income (22%), alternative investment (14%), and money market (11%) operations. Passive products account for 32% of Invesco’s total AUM, including 57% of the company’s equity operations and 13% of its fixed-income platform. Invesco’s U.S. retail business is one of the 10 largest non-proprietary fund complexes in the country. The firm also has a meaningful presence outside the U.S., with close to one third of its AUM sourced from Canada (2%), the U.K. (4%), continental Europe (11%), and Asia (15%).

(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

Roche’s Innovative Drug Portfolio and Complementary Diagnostics Division Support a Wide Moat

Business Strategy & Outlook

Roche’s drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche’s diagnostic arm. Roche’s biologics focus and innovative pipeline are key to the firm’s ability to maintain its wide moat and continue to achieve growth as current blockbusters face competition. Blockbuster cancer biologics Avastin, Rituxan, and Herceptin are seeing strong headwinds from biosimilars. 

However, Roche’s biologics focus (more than 80% of pharmaceutical sales) provides some buffer against the traditional intense declines from small molecule generic competition. In addition, with the launch of Perjeta in 2012 and Kadcyla in 2013, Roche has expanded its breast cancer franchise, and Phesgo, a subcutaneous coformulation of Herceptin and Perjeta, is launching in the U.S. Gazyva, approved in CLL and NHL and in testing in lupus, will also extend the longevity of the Rituxan franchise. Avastin’s lung cancer sales are vulnerable to biosimilars and competition from new therapies Opdivo and Keytruda, but Roche’s own immuno-oncology drug Tecentriq launched in 2016, and the peak sales potential is above $10 billion. Roche is also expanding outside of oncology with MS drug Ocrevus ($9 billion peak sales) and hemophilia drug Hemlibra ($6 billion peak sales). Roche’s diagnostics business is also strong. With a 20% share of the global in vitro diagnostics market, Roche holds the number-one rank in this industry over competitors Siemens, Abbott, and Ortho. Pricing pressure has been intense in the diabetes-care market, but new instruments and immunoassays have buoyed the core professional diagnostics segment.

Financial Strengths

Roche’s financial health remains robust. At the end of 2021, Roche’s net debt stood at CHF 18.2 billion, or 20% of total assets. Debt levels increased in late 2021 as Roche repurchased shares held by Novartis, but with debt maturities spread over the next several years, the firm will meet obligations easily. As per the estimate free cash flows north of CHF 15 billion annually over the next five years. Roche to maintain a dividend payout ratio around 50% going forward, implying mid-single-digit annual increases in dividends per share.

Bulls Say

  • Roche and its innovative U.S. arm Genentech have a solid history of generating blockbuster therapies in oncology, and Roche’s pipeline is full of novel candidates, with a particularly large late-stage pipeline. 
  • Hemophilia drug Hemlibra and MS drug Ocrevus have multi-billion-dollar sales and significant growth potential, further diversifying Roche’s revenue. 
  • Collaboration between its diagnostics and drug-development groups gives Roche a unique in-house angle on personalized medicine.

Company Description

Roche is a Swiss bio pharmaceutical and diagnostic company. The firm’s best-selling pharmaceutical products include a variety of oncology therapies from acquired partner Genentech, and its diagnostics group was bolstered by the acquisition of Ventana in 2008. Oncology products account for 50% of pharmaceutical sales, and centralized and point-of-care diagnostics for more than half of diagnostic-related sales.

(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

Even Against a Souring Backdrop, Wide-Moat Mondelez Continues to Bake Up Sweet Gains

Business Strategy & Outlook

Since taking the helm at Mondelez more than four years ago, CEO Dirk Van de Put has orchestrated a plan to drive balanced sales and profit growth by extending the distribution of its fare, fueling investments behind its local and global brands, empowering its local leaders, and increasing its innovation agility (aims that are hitting the mark). Against this backdrop, Mondelez targets 3%-5% sales growth long term as it works to sell its wares in more channels and reinvests in new products aligned with consumer trends at home and abroad. Further, it has looked to acquire niche brands to build out its category and geographic exposure, which has been prudent. But despite opportunities to bolster sales, one can never expect the pendulum to shift entirely to top-line gains under Van de Put’s watch; rather, based on his tenure at privately held McCain Foods and past rhetoric, one can suspect ensuring such growth was profitable would prove to be the priority.

As such, the suggestion that Mondelez is poised to realize additional efficiency gains favorably. While management has refrained from quantifying its cost-saving aims, an additional $750 million in costs (a low- to mid-single-digit percentage of cost of goods sold and operating expenses, excluding depreciation and amortization) it could remove (on top of the $1.5 billion realized before the pandemic). This can be achieved by extracting further complexity from its operations, including rationalizing its supplier base, parting ways with unprofitable brands, and continuing to upgrade its manufacturing facilities. One doesn’t expect these savings to merely boost profits, though. In this vein, management has stressed a portion of any savings realized would be spent in support of its brands in the form of research, development, and marketing, buttressing the brand intangible asset underpinning Mondelez’s wide moat. This aligns with the forecast for research, development, and marketing to edge up to nearly 7% of sales on average over the next 10 years (or about $2.4 billion annually), above historical levels of 6% ($1.7 billion).

Financial Strengths

In assessing Mondelez’s balance sheet strength, one doesn’t foresee any material impediments to its financial flexibility. In this vein, Mondelez maintained $3.5 billion of cash on its balance sheet against $19.5 billion of total debt as of the end of fiscal 2021. As per forecast free cash flow will average around 15% of sales annually over 10-year explicit forecast (about $5.4 billion on average each year). And returning excess cash to shareholders will remain a priority. Mondelez will increase its shareholder dividend (which currently yields around 2%) in the high-single-digit range on average annually through fiscal 2031 (implying a payout ratio between just north of 40%), while also repurchasing around 2%-3% of shares outstanding annually. Beyond prudently bolstering shareholder returns, Mondelez will continue scouring the landscape to expand its reach by adding brands and businesses in untapped categories and/or geographies from time to time–although one doesn’t believe it has much of an appetite for a transformational deal. The opportunity to expand its footprint into untapped markets–such as Indonesia and Germany–or into other adjacent snacking categories (like health and wellness) could be in the cards. Recent deals have included adding Tate’s Bake Shop for $500 million in 2018, Perfect Snacks (in 2019, refrigerated snack bars), Give & Go (2020, an in-store bakery operator), Chipita (2021, Central and Eastern European croissants and baked goods), Ricolino (2022, a leader in the Mexican confectionery space), and Clif Bar (2022, U.S. manufacturer of energy bars) to its fold. But at just a low-single-digit percentage of sales, none of these deals are material enough to move the needle on its overall results.

Bulls Say

  • Mondelez’s decision to empower in-market leaders and fuel investments behind its local jewels (which historically had been starved in favor of its global brands) stands to incite growth in emerging markets for some time. 
  • The posit the firm is committed to maintaining a stringent focus on extracting inefficiencies from its business, including the target to shed more than 25% of its non core stock-keeping units to reduce complexity. 
  • Management has suggested it won’t sacrifice profit improvement merely to inflate its near-term sales profile.

Company Description

Mondelez has operated as an independent organization since its split from the former Kraft Foods North American grocery business in October 2012. The firm is a leading player in the global snack arena with a presence in the biscuit (47% of sales), chocolate (32%), gum/candy (10%), beverage (4%), and cheese and grocery (7%) aisles. Mondelez’s portfolio includes well-known brands like Oreo, Chips Ahoy, Halls, Trident, and Cadbury, among others. The firm derives around one third of revenue from developing markets, nearly 40% from Europe, and the remainder from North America.

(Source: Morningstar)

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

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

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

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

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

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

CAR achieved strong revenue and earnings growth with double digit revenue and EBITDA growth in the US, South Korea and Brazil

Digital tablet display the stock market data

Investment Thesis:

  • Leading market position in online car classifieds. 
  • Overseas expansion provides new growth opportunities from the challenging core Australian market. 
  • Heavily reliant on two growth stories (South Korea and Brazil).
  • Diversified geographic coverage.
  • Bolt-on acquisitions provide opportunities to supplement organic growth.
  • The Company can sustain high single-digit and low double-digit revenue growth. 
  • CAR’s move into adjacent products and industries. 
  • Increasing pricing in South Korea to boost margins.
  • Looking to take more of the car buying experience online with dealers (i.e., increasing its total addressable market). 

Key Risks:

  • Rich and demanding valuation.
  • Competitive pressures, that is car dealer driven substitute platform or the No. 2 & 3 player gain ground on CAR.
  • Motor vehicle sales remain subdued.  
  • Value destructive acquisition / execution risk with international strategy.
  • Not immune from broader downturn in economy (consumer likely to delay a significant purchase in time of uncertainty). 

Key Highlights: 

  • FY22 Results Highlights. Relative to the pcp: Look-through revenue of $609m, up +36%. Look-through EBITDA of $324m, up +25%, on strong results and inclusion of Trader Interactive from September 2021.
  • Adjusted Revenue of $510m, up +16%, driven by strong domestic results in the Private and Media segments, growth in CAR’s Encar business in Korea and inclusion of revenue from tyre connect acquisition in July 2021. Adjusted EBITDA of $272m, up +7% (or excluding impact of wage subsidies in FY21, Adjusted EBITDA was up +10%). 
  • Adjusted NPAT of $195m, up +27% on strong contribution from Trader Interactive. Adjusted EPS of 69.0 cents, up +12%. 
  • On a reported basis, Revenue of $509m, up +19%, EBITDA of $270m, up +12% and NPAT of $161m, up +23% on pcp. Reported EPS of 56.9c, up 8%. 
  • CAR saw good cash flow with Reported EBITDA to operating cash flow conversion of 99%. 
  • The Board declared a fully franked final dividend of 24.5cps, up +9%.
  • Carsales Australia. Relative to the pcp and on a constant currency basis: Adjusted Revenue of $351.7m, up +10%, driven by Online Advertising revenue of $307.7m, up +11% and Data, Research and Services revenue of $44.1m, up +3%. Adjusted EBITDA of $227.2m was up +8%.
  • Dealer: 5% adjusted revenue growth to $183.8m was driven by growth in CAR’s online buying service, Carsales Select and Dealer Finance product heading into FY23, despite lockdowns in NSW and VIC in 1H22.
  • Private: +26% growth in adjusted revenue to $69.4m driven by strong uplift in private ad volume, private ad yield and Instant Offer penetration. 
  • Media: +15% uplift in adjusted revenue was driven by CAR’s strategy of diversifying into more native ad placements and non-automotive customer segments.
  • Data, Research & Services: Adjusted Revenue of $44.1m, was up +3% despite impact of lockdowns and ongoing inventory challenges for dealers.
  • Carsales International. CAR achieved strong revenue and earnings growth with double digit revenue and EBITDA growth in the US, South Korea and Brazil. Relative to the pcp and on a constant currency basis: Asia. Adjusted revenue of $95.4m, was up +17% and EBITDA of $48.1m, was up +12%, with management pointing to “strong product penetration growth across Guarantee, Dealer Direct and Encar Home. These products are expected to continue driving growth over the medium term”. 
  • Americas. Adjusted revenue of 6.0m was down -7%, whilst adjusted EBITDA was -$1.6m.

Company Description:

Carsales.com Ltd (CAR), founded in 1997, operates the largest online automotive, motorcycle and marine classifieds business in Australia. Carsales is regarded as one of Australia’s original disruptors and has expanded to include a large number of market-leading brands. The Company employs over 800 and develops world leading technology and advertising solutions in Melbourne. CAR has also expanded to numerous global markets, such as South Korea, Brazil, and other countries in Latin America.

(Source: Banyantree)

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

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

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

ORG saw FY22 underlying profit rise +30% YoY as higher earnings in Integrated Gas were partially offset by lower earnings in Energy Markets

Investment Thesis:

  • Higher oil prices benefit ORG’s APLNG project (higher revenues).
  • Balance sheet position is being restored with management focused on getting the debt covenants back to an investment grade level.
  • Achieving milestones within the APLNG project.
  • On-going focus on operating cost and capital expenditure reduction.
  • Increasing dividend profile and with a restored balance sheet the Company can also consider other capital management initiatives. 
  • Rationalization of asset portfolio, including asset sales and the IPO of its conventional upstream business should help improve the balance sheet position.  

Key Risks:

  • Exploration and production risks.
  • Lower energy prices, particularly oil prices (for its APLNG project). 
  • Structural change in energy markets & increased competition.  
  • Not meeting cost-out targets. 
  • Highly geared balance sheet, with the company not being able to reduce debt fast enough. 

Key Highlights:

  • Outlook. Management expects (refer to figure 2 for details): For FY23 underlying earnings to be higher YoY, driven by growth in earnings from the gas business, while electricity gross profit to remain suppressed, risk of coal under-delivery remaining including due to rail and mine performance, and Australia Pacific LNG (APLNG) production of 680-710 PJ, reflecting ongoing strong field performance and allowing for the impact of recent wet weather events. 
  • For FY24 underlying earnings delivering further YoY growth with magnitude of growth dependent on fuel and energy prices and the extent to which these are reflected in customer tariffs, the outcome of a price review on ~50 PJ of gas supply, and delivery of targeted retail savings. 
  • APLNG sale completed – proceeds used to strengthen balance sheet and provide shareholder returns. The Company benefited from a record cash distribution from the sale of a 10% interest in APLNG of $1,595m, due to higher realized oil and spot LNG prices, contributing to a strong FCF of $1,062, up +3.1% YoY with management using the proceeds to reduce adjusted net debt by -38.8% to $2,838m (leverage declined to 1.9x vs target range of 2-3x), investing in growth and shareholder returns, including a $250m share buyback and a 75% franked final dividend of 16.5cps, equating to full year dividend of 29cps, up +45% YoY and representing 47% of FCF, towards top end of management’s target range of 30-50%. Management also announced the Board is considering extending the initial $250m share buyback over the course of FY23, subject to operating conditions and growth opportunities.
  • FY22 results summary. Underlying profit rose +30% YoY to $407m, as strong commodity prices drove higher earnings in Integrated Gas, partially offset by lower earnings in Energy Markets due to very challenging market conditions which led to a contracted coal supply. Statutory profit was a loss of $1,429m vs loss of $2,281m in pcp, impacted by a non-cash impairment associated with accounting for electricity and gas derivative assets. 
  • Operating cash flow declined -45% YoY, driven by lower underlying EBITDA adjusted for non-cash items partially offset by an improved working capital position.
  •  Liquidity remained strong at $3.3bn including $0.6bn of cash, enough to meet near-term debt and lease liability payment obligations of $0.3bn.
  • Results by segment. Energy Markets underlying EBITDA declined -63% YoY impacted by high commodity prices and domestic supply interruptions, combined with volatile wholesale electricity prices, higher fuel costs and wet weather. Investment in Octopus continued to exceed expectations, with the company growing to become the UK’s fifth largest energy retailer, increasing its customer base by +25% YoY to 5.5 million customer accounts. The Company achieved $170m of a targeted $200-$250m in cash cost savings by FY24.
  •  Integrated Gas underlying EBITDA increased +62% YoY, driven by high commodity prices, sustained low operating and capital costs, and stable production. 

Company Description:

Origin Energy (ORG) is an integrated energy company with operations in exploration, production, generation and the sale of energy to millions of households and businesses across Australia. The Company has extensive operations across Australia and New Zealand and is pursuing opportunities in the fast-growing energy markets of Asia and South America. The Company has two main segments: (1) Energy Markets – retail sales of electricity, gas and other customer solutions; electricity generation; and wholesale trading of electricity and gas. (2) Integrated Gas – consists of upstream exploration, development and production; the segment also holds the 37.5% ownership in Asia Pacific LNG project (APLNG).

(Source: Banyantree)

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

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

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

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

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

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

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

Categories
Technology Stocks

TPG Telecom’s price-leader strategy still sees the company delivering solid subscriber and market share performance

price of btc is going to breakout

Business Strategy & Outlook

TPG Telecom is grappling with structural changes in the Australian telecom 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, 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
Commodities

Exxon’s Integrated Model Benefits From Current Market; Increasing Fair Value Estimate

Business Strategy & Outlook

While many of its peers have announced intentions to divert investment to renewables to achieve long-term carbon intensity reduction targets, ExxonMobil remains committed to oil and gas. It has responded to calls to bring in more outside voices to its board and announced emissions reduction targets. It is also investing in low-carbon technologies, but each of these efforts is measured and keeps oil and gas production at the core. While this strategy is unlikely to win praise from environmentally oriented investors, it’s likely to prove more successful and probably holds less risk. The end of oil is likely to occur, but not anytime soon. Gas is likely to have an even longer life, thanks to the relative attractiveness of its emissions intensity to coal for power generation and the need to supplement intermittent renewable power. These trends along with growing demand for chemicals are what drives Exxon’s investment strategy and will likely deliver superior returns. To satisfy investors, Exxon has reduced previously aggressive spending plans by over 30% to $20 billion-$25 billion annually for 2022-26, which should keep the dividend safe at $50 a barrel. Earnings should still grow, however. Current plans call for a doubling of earnings and cash flow from 2019 levels by 2027, thanks to structural cost efficiencies and high-margin new projects. Production will grow modestly through 2027, but portfolio profitability is set to improve thanks largely to high-margin Guyana volumes (more than 850 thousand barrels of oil equivalent per day by 2027) backfilling declines in North American dry gas production and lower value divestments. Exxon’s high-quality Permian position, which affords capital flexibility and generates free cash flow, should surpass 800 mboe/d by 2027. Exxon’s downstream and chemical segments have suffered from decade-low industry margins in the recent past, but market conditions are beginning to revert to midcycle levels, lifting earnings. Investments will focus on producing higher-value lubricants and diesel in its downstream segment and performance products in its chemical segment, which should lift returns and earnings further.

Financial Strengths

In 2020, Exxon relied on its balance sheet to avoid cutting its dividend. As a result, gross debt increased from $46.9 billion at year-end 2019 to $67.6 billion at year-end 2020. By year-end 2021, Exxon reduced total debt to $47.7 billion, bringing debt/capital to 22%, within its targeted range of 20%-25%. Further debt reduction year to date has brought net debt/capital to 13% by mid-2022. Management expects to spend $21 billion-$24 billion in 2022, in line with its long-term guidance of $20 billion-$25 billion annually through 2027. At this level, Exxon estimates it can cover the capital program and dividend, assuming $37/bbl oil and average downstream and chemical margins in 2022. Proceeds from the remaining half of an ongoing $15 billion divestment program should supplement cash flow, as well. There is enough flexibility in the plan to keep the dividend safe in the event that commodity prices are marginally lower than expected. In a higher oil price environment, one does not expect Exxon to increase capital spending but to direct excess cash flow to debt reduction and shareholder returns. After reintroducing share repurchases with a $10 billion plan, Exxon increased that amount to $30 billion through 2023. Dividend growth is likely to resume soon, given the sharp reduction in debt. Shareholder return increases, particularly repurchases, should continue, considering the high oil price environment and guidance for $100 billion in surplus cash flow through 2027 assuming $60/bbl oil.

Bulls Say

  • Exxon has responded to shareholder concerns by reducing spending, appointing new board members, increasing disclosure, and announcing emissions reduction targets. 
  • Exxon will see its portfolio mix shift to liquids pricing as gas volumes decline and new oil projects start production. Cash margins should improve as a result, thanks to Permian and Guyana volumes. 
  • With coordination between upstream and downstream operations, as well as integrated refining and chemical facilities, Exxon achieves a high level of integration that creates value, as opposed to simply owning the assets.

Company Description

ExxonMobil is an integrated oil and gas company that explores for, produces, and refines oil around the world. In 2021, it produced 2.3 million barrels of liquids and 8.5 billion cubic feet of natural gas per day. At the end of 2021, reserves were 18.5 billion barrels of oil equivalent, 66% of which were liquids. The company is the world’s largest refiner with a total global refining capacity of 4.6 million barrels of oil per day and one of the world’s largest manufacturers of commodity and specialty chemicals.

(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

Keysight Dominates Communications Testing With a Broad and Comprehensive Portfolio of Solutions

Business Strategy & Outlook

The Keysight Technologies is the leader in communications testing and measurement solutions, and offers a vendor-agnostic way to invest in the rapidly growing 5G market. The Keysight has the strongest and broadest communications testing capabilities in the market, inclusive of hardware, software, and services. A comprehensive portfolio allows Keysight to act as a strategic partner to its customers, enabling new designs and accelerating time to market for network operators, network equipment OEMs, device OEMs, and suppliers. The Keysight can reduce time to market for customers more than competitors as a result of its end-to-end portfolio of premium offerings. The Keysight’s leadership stems from its large investment in R&D–annually doubling that of the nearest competitor–that it focuses on the communications market. The hefty organic and inorganic investment has led to Keysight leading the market pivot toward software and credit its unmatched portfolio breadth for its top market share. A broad portfolio that layers software and services on top of hardware embeds Keysight into customer workflows and entrenches customers in its ecosystem. A broad, sticky portfolio underpins the wide economic moat rating for the firm. Keysight should continue to dominate the communications market, especially as it pivots toward more complex 5G testing in which it is already demonstrating proficiency. The market share gains for Keysight and think greater complexity in 5G networks will expand its wallet share at customers–both of which would result in continued outperformance of the underlying testing market. The firm to continue shifting customers to subscription billing for its software and services and think it will complement continued organic investment with strategic M&A to further build out its software portfolio. The growing mix of software and services to expand margins. Finally, the Keysight to continue generating impressive cash flow and to send a large proportion of it back to shareholders.

Financial Strengths

The Keysight Technologies to continue generating impressive cash flow, which will fund organic and inorganic investment as well as returns to shareholders. As of Oct. 31, 2021, the firm held a net cash position, with $2.1 billion in cash on hand and $1.8 billion in gross debt. The firm will stay leveraged–especially with its current long-term maturities–but pay off its debt as it comes due. The firm also has an untapped $450 million revolver that expires in February 2022.The Keysight to continue its record of strong cash generation. The firm has converted well over 100% of its net income into free cash flow since 2017, and this pattern to carry forward through the forecast. As per forecast over 100% free cash flow conversion through 2026 and anticipate more than $1 billion in free cash flow annually during this period.

Bulls Say

  • The Keysight’s large research and development budget has created a competitively advantaged portfolio for communications testing that one doesn’t expect other firms would be able to easily replicate. 
  • Keysight holds a majority share of the 5G testing market, which will elicit strong top-line growth and expand profitability over the next five years. 
  • The Keysight to continue converting over 100% of net income into free cash flow, and predict it to generate over $1 billion in free cash flow annually over the forecast.

Company Description

Keysight Technologies is a leader in the field of testing and measurement, helping electronics OEMs and suppliers alike bring products to market to fit industry standards and specifications. Keysight specializes in the communications market, but also supplies into the government, automotive, industrial, and semiconductor manufacturing markets. Keysight’s solutions include testing tools, analytical software, and services. The firm’s stated objective is to reduce time to market and improve efficiency at its more than 30,000 customers.

(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

ASX’s Elevated Cost Growth Unlikely to Be Sustained

Business Strategy & Outlook

The ASX to deliver a low-single-digit EPS compound annual growth rate over the next decade, with the wide economic moat protecting strong margins and enabling returns on invested capital to exceed the weighted average cost of capital. The capital-light business model and a lack of desire to undertake acquisitions should enable strong cash conversion, a 90% dividend payout ratio, and a debt-free balance sheet. The yield nature of the stock means the share price to be largely driven by bond market movements and central bank interest rates. One cannot expect competition to materially undermine earnings, despite the evolving regulatory and competitive landscape. One can expect long-term growth in market value to underpin EPS growth. The relatively reliable nature of earnings influences the medium fair value uncertainty rating. The ASX has long been protected by two significant barriers to competition through regulation and network effects. The federal government and regulators have sought to increase competition for nearly a decade, but the process of regulatory reform is slow and still has many obstacles to overcome. In March 2016, the government reiterated its desire for competition in cash equities clearing, which constitutes just 7% of ASX group revenue, but not in cash equities settlements, which make up a further 6% of group revenue. However, a government report found that even if competition were allowed in cash equities clearing, competitors are unlikely to emerge, as the regulatory requirement to maintain operations and regulatory capital in Australia reduce potential synergies for overseas clearinghouses. There are currently no proposals to introduce competition in derivatives clearing, ASX’s largest business (comprising around a third of group revenue), with obstacles such as cross-margining acting as a barrier to competition.

Financial Strengths

ASX is in good financial health due to its dominant Australian securities exchange, high margins, and capital-light business model. The company is debt-free and has been for many years, a situation to continue for the foreseeable future. The wide economic moat has protected consistently strong and stable EBIT margins of around 70% over the past decade, and as per forecast an average EBIT margin of around 65% over the next five years. Although revenue is vulnerable to market declines to some degree, the large margins limit leverage at an EPS level. A lack of capital requirements enables a dividend payout ratio of 90%, which one can expect to continue for the foreseeable future. ASX lacks an appetite for acquisitions, which is not a bad thing in one opinion. The company seeks to drive growth organically through product innovation and cost efficiencies. One cannot expect this strategy to change. ASX has a simple, maintainable capital structure comprising solely ordinary equity. Shares on issue have been reasonably stable for the past decade, with capital expenditures funded from cash flow. ASX also records participant balances on its balance sheet, which represents cash deposits that clearing participants are required to make to satisfy margin requirements on outstanding positions. This cash is invested in cash, as well as various money market instruments.

Bulls Say

  • Long-term earnings growth is underpinned by growth in the value of the stock market and protected by a wide economic moat. However, in the short term, earnings can be affected by market weakness, although EPS fell just 7% during the global financial crisis. 
  • ASX has a wide economic moat underpinned by network effects and regulation. This competitive advantage to protect EBIT margins of around 65% over the next decade and a low-single digit EPS CAGR. 
  • ASX is financially robust with a good balance sheet, strong cash flow, and tight cost control.

Company Description

ASX is the largest securities exchange in Australia with an effective monopoly in listing, trading, clearing, and settlement of Australian cash equities, debt securities, investment funds, and derivatives. Other activities include the technology services, enforcing exchange rules, and exchange-related data. The ASX demutualized and listed on its own exchange in 1998 and subsequently acquired the Sydney Futures Exchange in 2006.

(Source: Morningstar)

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