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Commodities Trading Ideas & Charts

Hess’s track record for efficiently allocating capital and generating value has been steadily improving for several years

Business Strategy & Outlook

Hess’ track record for efficiently allocating capital and generating value has been steadily improving for several years. This had been a source of frustration for shareholders in the past. Before 2012, the firm was struggling with persistent budget overruns and costly exploration failures, and the eventual collapse in its share price led to a heated proxy fight with an activist investor (which it lost). Subsequently, the board was reshuffled and management began streamlining the company, selling midstream and downstream assets and rationalizing its upstream portfolio. The current portfolio is substantially more competitive, but the development cost requirements are heavily front-loaded. Currently, Hess is one of the largest producers in the Bakken Shale. This includes a large portion in the highly productive area near the Mountrail-McKenzie county line in North Dakota. Management believes this acreage still contains at least 2,000 incremental drilling opportunities and hopes to develop this asset with a four-rig program in the long run (giving it well over 10 years of potential drilling inventory). Four rigs would optimize the usage of its infrastructure and keep production flat at around 200 mboe/d. But in 2022, the firm is allocating capital stringently and is only planning for three rigs.

Hess also holds a 30% stake in the Exxon-operated Stabroek block in Guyana, which will be the firm’s core growth engine going forward and is a game-changer for the company, due to its large scale and exceptional economics. Current guidance indicates 6 development phases will come online by 2027, culminating in gross volumes of about 1.2 mmb/d. But with over 20 confirmed discoveries already, this feels conservative. Four developments have been sanctioned to date, and two of them are already producing. Management has hinted at 10 phases in the ultimate development. Total gross recoverable resources in the region are a moving target, but the latest estimate is over 11 billion barrels of oil equivalent.

Financial Strengths

Hess’ Guyana assets are capital-intensive (it must pay 30% of the development costs, which run to $1 billion-$2 billion for each sanctioned phase of development; a total of six are currently planned and more than that are likely eventually). And these commitments are heavily front-loaded. As a result, capital spending has significantly exceeded cash flows in the last few years. However, the firm has made the best of very strong commodity prices recently, while enjoying peer-leading revenue growth due to its ongoing expansion in Guyana. As a result, the firm’s leverage ratios are close to historical norms, and are likely to decline further given that all of Hess’ assets are now generating net cash flows. At the end of the last reporting period, debt/capital was 50%, while net debt/EBITDA was 0.9 times. In any case, the firm’s liquidity backstop is very strong. The firm has a $2.2 billion cash war chest, and there is more than $3 billion available on its credit facility as well. In addition, the term structure of the firm’s debt is fairly well spread out, and there are no maturities before 2024 (other than a $500 million term loan due 2023 and likely to be paid in full with operating cash flows by the end of 2022). The firm does have a covenant requiring it to keep debt/capital above 0.65, though it isn’t expected to get close to that level even in a downturn scenario, because in the associated debt agreement capital is defined to exclude impairments.

Bulls Say

  • The Stabroek block (Guyana), in which Hess has a 30% stake, is a huge resource, with at least 10 billion barrels of oil equivalent recoverable.
  • The first phase of the Liza development is profitable at around $30/bbl (Brent), making it competitive with the best shale. Management expects similar economics from subsequent projects in Guyana.
  • Hess’ activity in Guyana provides geographic diversification and insulates it from domestic issues (like anti fracking regulations).

Company Description

Hess is an independent oil and gas producer with key assets in the Bakken Shale, Guyana, the Gulf of Mexico, and Southeast Asia. At the end of 2021, the company reported net proved reserves of 1.3 billion barrels of oil equivalent. Net production averaged 315 thousand barrels of oil equivalent per day in 2021, at a ratio of 69% oil and natural gas liquids and 31% natural gas.

 (Source: Morningstar)

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

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

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

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

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

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Dividend Stocks

Samsung became the top supplier of DRAM in the mid-90s, and now has a 42% market share in 2020

Business Strategy & Outlook

Samsung Electronics has been a fantastic growth story as it established itself as the clear global leader in the smartphone space during the past decade, following its success in becoming the global top manufacturer of flat panel TV in the 2000s. However, no economic moat from its consumer electronics business, as these products are mature and difficult to differentiate, and are exposed to the tough competition from Chinese manufacturers. Unlike its competitor Apple, Samsung does not have an ecosystem that prevents users from switching to other brands. Meanwhile, Samsung’s semiconductor business will remain the profit driver in the longer term, driven by the robust growth of data traffic. Samsung led the global semiconductor industry in terms of revenue in 2017, knocking Intel from the top spot for the first time since 1992. According to Omdia, Samsung became the top supplier of DRAM in the mid-90s, and now has a 42% market share in 2020. The company is also the global top supplier of NAND with 34% market share. Demand growth for memory has been supported by the diffusion of digital devices, such as note PCs and smartphones, over the past two decades. The new telecom standards will not only enable richer content on existing devices, but will also ignite digitalization in non-IT industries, which will continue to drive the growth in data traffic. Also, the big data trend will accelerate from artificial intelligence demand.

Owing to technological obstacles, the costs necessary to achieve higher capacity per memory are becoming much higher than the past, which has forced smaller players to withdraw from the market. Samsung will maintain its cost advantage, which stems from a better product mix, underpinned by technical advantages and increased research and development expenses.

Financial Strengths

Samsung has a very strong financial position, with net cash (including short-term financial instruments) of KRW 103 trillion by the end of December 2020.Samsung shareholders should see an increased flow of shareholder returns over the next few years. According to its new shareholder policy announced in January 2021, the company expects to spend at least KRW 9.8 trillion on dividends from 2021 to 2023, which equates to a dividend of around KRW 1,440, implying approximately a 25% dividend payout ratio. The firm retains its commitment to return 50% of free cash flow in the form of either dividends or buybacks. If earned free cash flow over the next three months exceeds KRW 9.8 trillion, the remainder would be paid as special dividends at the end of 2023.

Bulls Say

  • Samsung’s flexible-screen advantage can be leveraged into increased smartphone market share.
  • The memory manufacturing market has consolidated to three or four main players, which could stabilize the market. Demand driven by mobile devices will allow this division to make up for any declines in mobile.
  • Samsung’s stock price is inexpensive, with shares having traded at a single-digit or low-double-digit P/ E ratio for the past few years.

Company Description

Samsung Electronics is a diversified electronics conglomerate that manufactures and sells a wide range of products, including smartphones, semiconductor chips, printers, home appliances, medical equipment, and telecom network equipment. About half of its profit is generated from semiconductor business, and a further 30%-35% is generated from its mobile handset business, although these percentages vary with the fortunes of each of these businesses. It is the largest smartphone and television manufacturer in the world, which helps provide a base demand for its component businesses, such as memory chips and displays, and is also the largest manufacturer of these globally.

 (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

QBE Insurance: The Board Declared an Interim Dividend of A11 cps in the pcp, and Reflects a Pay-out Ratio of 57%

Investment Thesis:

  • On valuation grounds, QBE trades in-line with fair value.
  • Solid FY23 guidance.
  • New CEO announced a fresh perspective and potential rebasing of earnings. 
  • As a global insurer, QBE’s operations are much more diversified than domestic peers which means insurance risk is more spread out. 
  • Solid global reinsurance program should insulate earnings from catastrophe claims.
  • Expected prolonged period of lower interest rates (which does not benefit QBE’s investment portfolio).
  • Committed to the share buyback program.
  • Undertook a simplification process and sold non-core operations.

Key Risks:

  • Prolonged period of pricing pressures.
  • Adverse CAT claims.
  • Ongoing prolonged period low interest rates and volatility in credit spreads which affects QBE’s predominately defensive portfolio. 
  • As a global insurer, QBE’s operations are much more diversified than domestic peers which means insurance risk is more spread out. However, at the same time, as it underwrites across the globe, the business it is more difficult to forecast and analyse claims and pricing environment as well as reinsurance.
  • Undesirable investment returns below management guidance.
  • Prolonged poor performances in Asia.

Key Highlights:

  • Relative to the pcp, in US$ and on a statutory basis: gross written premium (GWP) of $11,552m was up from $10,203m, whilst net earned premium of US$6,789m was up from $6,571m. Adjusted GWP of $11,609m was driven by Group growth of +18% on a constant currency basis, or 13% excluding Crop. QBE saw ongoing growth across all divisions, with North America, International and Australia Pacific, up +24%, +19% and +6% respectively. QBE saw average renewal premium rate increases of +8.1% (North America, +10.4%, International, +7.0%, Australia Pacific, +9.1%), versus 9.7% in 1H21.
  • Combined operating ratio (ex risk-free rate) of 94.1% versus 93.3% in the pcp. On an adjusted basis, QBE’s combined operating ratio of 92.9% versus 93.3% in the pcp reflected higher rate increases and premium growth, lower net catastrophe costs and improvement in acquisition costs.
  • QBE achieved a poor total investment loss of $(840) m or (3.0) %, compared with return of $58m or 0.2% for the prior period, mainly as a result of unrealised losses associated with the significant increase in bond yields during the period.
  • According to management, “adjusting for the impact of changes in risk-free rates on fixed income securities, the total investment return was $14m or +0.1% for the half, a decrease from 0.7% in the prior period. In fixed income, the core yield from the portfolio was almost fully offset by adverse credit spread marks, and within risk assets, the returns from infrastructure and unlisted property were largely offset by unrealised losses on equities and enhanced fixed Income”.
  • NPAT of $151m was down from $441m, whilst adjusted net cash profit after tax of $169m was weaker than the $463m in the pcp.
  • Probability of adequacy of 91.7% remains robust (versus 92.3% in the pcp).
  • The Board declared an interim dividend of A9cps, down from A11cps in the pcp, and reflects a pay-out ratio of 57%.

Company Description:

QBE Insurance Group Ltd (QBE) is a global general insurer that underwrites commercial and personal policies across North America, Australia and New Zealand, Europe and emerging markets. QBE’s Equator Re segment is its captive reinsurer, providing reinsurance protection to the entire Group’s operating divisions.

(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

Telstra Corporation (TLS) provides telecommunications and information products and services

Investment Thesis:

  • Solid FY23 guidance.
  • Solid dividend yield. 
  • Despite intense competition, subscriber growth numbers remain solid. 
  • In the long-term, the introduction of 5G provides potential growth, however, to monitor the ROIC from the capex spend. 
  • TLS still commands a strong market position and has the ability to invest in growth technologies and areas (e.g., Telstra Ventures) which could provide room for growth.
  • Industry consolidation leading to improved pricing behavior by competitors. 

Key Risks:

  • Further cuts to dividends.
  • Further deterioration in the core mobile and fixed business.  
  • Management fails to deliver on cost-out targets and asset monetisation. 
  • Any increase in churn, particularly in its Mobile segment – worse than expected decrease in average revenue per users (or any price war with competitors).
  • Any network disruptions/outages.
  • More competition in its Mobile segment. Merger of TPG Telecom and Vodafone Australia creates a better positioned (financially and resource wise) competitor
  • Quicker than expected deterioration in margins for its Fixed segment.
  • Risk of cost blowout in upgrading network and infrastructure to 5G.

Key Highlights:

  • FY23 guidance consistent with previous guidance. Total Income of $23.0bn to $25.0bn.
  • Underlying EBITDA of $7.8bn to $8.0bn.
  •  Capex of $3.5bn to $3.7bn. 
  •  Free cash flow after lease payments (FCFalA) of $2.6bn to $3.1bn. 
  •  On underlying EBITDA, guidance is provided within TLS’ previous FY23 ambition range, plus a contribution from Digicel Pacific, which is included in all FY23 measures. 
  • Capex guidance includes ~$350m of strategic investments in inter-city fibre and for the Viasat contract, and ~$150m for Digicel Pacific.
  • Key Highlights by Product. Underlying EBITDA of $7,251m was up +8.4%. Relative to the pcp: Mobile. EBITDA of $3,997m, was up +21.2%. The mobiles business performed strongly with $700m EBITDA growth (which equates to an +21.2% uplift), 2.9% postpaid handheld ARPU growth and 6.4% mobile services revenue growth. The product line saw 155,000 net retail postpaid handheld services added.
  •  Fixed – Consumer & Small Business. EBITDA of $55m, was down -60.4% and according to management “continued to be impacted by the tail end of the nbn migration, however there is confidence that EBITDA has bottomed. While retail bundles reduced by 87,000, bundle and standalone data ARPU increased by 2.4%”. 
  •  Fixed – Enterprise. EBITDA of $660m, was up +2.3%. Enterprise returned to growth at both the income and EBITDA level. Fixed Enterprise EBITDA increased 2.3%, with NAS EBITDA growth of $152m offsetting declines in data access and connectivity. 
  • Fixed – Active Wholesale. EBITDA of $159m, was down -31.2%.
  • International. EBITDA of $387m, was up +15.2%. 
  •  InfraCo Fixed. EBITDA of $1,655m, was down -1.1%. Income was $2.4bn, with core access revenue up 3.1% including nbn recurring receipts up 3.3%. 
  • Amplitel. EBITDA of $294m, was down -2.0%. According to management “Amplitel was established as a standalone business with sale of a non-controlling 49% interest delivering net cash proceeds after transaction costs of $2.8bn. Amplitel revenue increased by 8.9%”. 
  • Other (Miscellaneous & Telstra Health). EBITDA of $44m, was down from $68m in the pcp. Telstra Health had a strong FY22 with revenue up 51% to $243m (which encompasses Medical Director and Power Health acquisitions.

Company Description:

Telstra Corporation (TLS) provides telecommunications and information products and services. The company’s key services are the provision of telephone lines, national local and long distance, and international telephone calls, mobile telecommunications, data, internet and on-line. Its key segments are Mobile, Fixed, Data & IP, Foxtel, Network applications and services and Media.

(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

KLA Tencor has built its leading technical expertise and extensive knowledge base into a wide economic moat

Business Strategy and Outlook 

KLA dominates the process diagnostic and control segment of the semiconductor equipment industry. During the fabrication process, wafers must be inspected for defects and proper critical dimensions to identify and rectify problem sources. As customers continue pursuing Moore’s Law, smaller chips must meet more precise specifications, which in turn increase the need for advanced PDC tools. These tools help customers improve semiconductor die yields, accelerate development and product ramps, and ultimately maximize profitability. KLA boasts a wide economic moat and is well positioned for healthy growth going forward.

With a 50%-plus share in the PDC market and installed base of 48,000 tools, KLA-Tencor has built its leading technical expertise and extensive knowledge base into a wide economic moat. These competitive advantages have allowed the firm to maintain its technological edge through a large research and development budget and close relationships with customers to identify future needs in the PDC space. The firm is not immune to the cyclicality of the semiconductor equipment market and thus may face bouts of low capital expenditures due to prolonged process nodes and increased tool reuse. However, KLA has been able to charge a premium for its specialized products, as competitors’ offerings are generally not as advanced. This allows the firm to handle cyclical troughs fairly well for a company that operates in the chip equipment industry. KLA is well positioned for the long-term, as chipmakers will require more advanced PDC tools to go with fabrication technologies featuring smaller circuit sizes, new materials, and more process steps. For example, EUV lithography, which is being deployed at process nodes 7-nanometer and below, requires new PDC tools to help validate and maintain the new technology. This endeavour requires a large research and development budget that only firms such as KLA can provide. The firm’s acquisition of Orbotech provides solid diversification into the flat panel display and printed-control board markets, though these tools are slightly margin-dilutive relative to KLA’s core offerings.

Financial Strength

Historically, KLA-Tencor has maintained excess cash over its debt balance. However, with the leveraged recapitalization in 2015, the company went to a net debt position for the first time. At the end of fiscal 2022, KLA reported $2.7 billion in cash, cash equivalents, and marketable securities versus $6.6 billion in long-term debt. While the firm has been able to generate sufficient cash to service the outstanding debt and maintain healthy R&D investments, one can remain vigilant for signs that KLA is unable to appropriately accomplish either requirement. During cyclical downturns, typically prefer to see equipment providers have a healthy cash cushion.

Bulls Say’s

  • KLA is the leader in a highly profitable segment. PDC tools lower production costs and maximize productivity for chipmakers, making them a crucial part of the semiconductor manufacturing process.
  • KLA has the most extensive data and knowledge base in the PDC market, which it has gained through years of industry leadership, making it difficult for competitors to catch up. 
  • By focusing on PDC, KLA has carved a leadership position in this increasingly important subsegment of the equipment market.

Company Profile 

LA designs and manufactures yield-management and process-monitoring diagnostic and control systems for the semiconductor manufacturing industry. The systems are used to analyse the manufacturing process at various steps in a semiconductor’s development. The firm’s laser-scanning products are used for wafer qualification, process monitoring, and equipment monitoring. KLA also provides inspection tools and systems for optical metrology and e-beam metrology.

(Source: MorningStar)

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

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

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Suncorp Group Ltd: Dividend Pay-Out Ratio of 60-80% of Cash Earnings, Remains Unchanged

Investment Thesis:

  • Reasonable valuations – SUN currently trades on a 2-yr forward PE-multiple of 11.6x and a fully franked yield of 6.5%. 
  • Company reaffirmed FY23 targets and a solid FY23 outlook.
  • APRA allows advanced accreditation for SUN’s Bank resulting in capital relief.
  • Better than expected margin outcome in banking and general insurance (GI).
  • Positive industry changes from the Royal Commission recommendations. 
  • Continual strong credit quality for its Bank and Wealth segment whilst maintaining net interest margins.

Key Risks:

  • Greater than expected competition in lines of insurance affecting pricing, unit growth, and risk management.
  • Continuing elevated natural catastrophe occurrences such as the NSW bushfires, which will use up reinsurance and impact SUN’s earnings.
  • Not achieving key targets for FY21 such as the rollout of the Company’s technology and digital platforms.
  • Weaker than expected investment yields.
  • Lower net interest margins or higher provisions than expected.
  • Increased levels of claims.

Key Highlights:

  • Cash return on equity above the through-the-cycle cost of equity.
  • Dividend pay-out ratio of 60% to 80% of cash earnings, remains unchanged.
  • General Insurance. Underlying ITR of 10 – 12% by FY23.
  • Banking. Cost-to-income ratio of Banking ~50% by end of FY23. SUN’s management also provided FY23 Outlook, expecting: (i) GWP growth expected to be in the mid to high single digits; (ii) Price increases to reflect increasing reinsurance and natural hazards costs and inflationary environment; (iii) Unwind of mark-to-market investment losses to grow yield and support UITR; (iv) Prior year reserve releases expected to moderate; (v) Transitory capital impacts to unwind.
  • FY22 Results Highlights. Relative to the pcp: (1) Group net profit after tax of $681m, down 34.1% impacted by volatile investment markets and elevated natural hazard costs. (2) The Board declared a fully franked final ordinary dividend of 17cps, bringing total fully franked ordinary dividends for FY22 to 40cps, and represents a full year dividend payout of 75% of cash earnings and within SUN’s target payout ratio range of 60% to 80%.
  • Results highlighted by division. Profit after tax of $697m, was down -40.2%, whilst cash earnings of $673m was down -36.7%, due to weaker performance across all segments, especially in Insurance Australia. Relative to the pcp:
  • Insurance Australia. Profit after tax of $174m, was down -68.2% due to intense natural hazard season and volatile financial markets. Net incurred claims of $5,328m was +3.1% higher whilst insurance trading result of $464m was -28.0% down despite gross written premium (excluding Emergency Services Levies) of $9,384m, was up +9.2%.
  • SUN Banking. Profit after tax of $368m, was down -12.2%. Net interest margin fell 14bps to 1.93%. Home lending, up $4.1bn or 9.0%. Cost to income ratio of 59.0% was up 190bps, due to one-off unrealised mark-to-market losses and an increase in strategic investment. Normalising for these factors, the ratio reduces to 57.5%. SUN Bank maintained strong capital, funding and liquidity metrics (CET1 capital ratio of 9.08% remained within the target operating range of 9.00% to 9.50%).
  • SUN NZ. Profit after tax of $155m, was down -22.5%. General Insurance profit after tax was NZ$150m, down 15.3%. GWP increased 14.1% driven by strong growth across all product classes via unit growth and GWP increased 14.1% driven by strong growth across all product classes via unit growth and targeted pricing increases to offset inflationary pressures on claims. Net incurred claims rising bond yields and volatility in equity markets. Operating expenses were up 7.2% to NZ$504m, supporting growth across the business.

Company Description:

Suncorp Group Ltd (SUN) provides general insurance, banking, life insurance, and superannuation products and related services to the retail, corporate, and commercial sectors in Australia and New Zealand. The company operates through Personal Insurance, Commercial Insurance, General Insurance New Zealand, and Banking segments.

(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

Arista is well positioned as a pioneer in the new age of software-defined networking and will continue to be a leader in next-generation switches and routers

Business Strategy and Outlook 

Arista Networks has solidified its market presence through data center switching and software-based networking innovation, and customers will remain loyal to the firm’s Extensible Operating System software and peripheral products. Arista’s initial growth came from high-frequency trading firms that found value in its low-latency switches and EOS. By remaining at the forefront of switching and routing speeds, Arista became a key networking supplier to giant cloud operators, service providers, and enterprises. EOS’ novelty lies in its single software image that provides a consolidated view of device activity from end to end and its ability to centrally upgrade the entire network. EOS contains leading software-defined networking features while remaining intuitive and fully programmable. Additional software offerings like CloudVision expand functionality and interoperability across networks. Arista uses merchant silicon for its hardware, which allows the company to focus on its core competencies.

Arista works closely with its core customers to optimize their networking ecosystems, which can strengthen its customer switching costs. To expand its customer base beyond the data centers of hyperscale cloud providers, enterprises, service providers, and financial institutions, Arista entered into the campus market. The adjacent move is due to requests from existing customers desiring one software platform across networking locations, and Arista has bolstered its clout with wireless and security capabilities. Even with current customer concentration risk, hence Arista is growing alongside key customers and that new ventures have expanded from core competencies. Arista is well positioned as a pioneer in the new age of software-defined networking and will continue to be a leader in next-generation switches and routers.

Financial Strength

Arista is in a financially healthy position; its zero debt balance and $3.4 billion in cash, cash equivalents, and marketable securities as of the end of 2021 provide flexibility for the future. With no stated plans to return capital to shareholders, the company’s investment plan is fixated on developing products and expanding sales. The company’s financial health will remain stable and that cash could be deployed for growth via bolt-on products or technologies.

Bulls Say’s

  • Demand for EOS continuity across networks should proliferate Arista’s installation base. Installation base growth causes new customers to consider Arista during upgrades. 
  • Arista has been a first mover on its path to rapid profitable growth. Upcoming industry disruptions that Arista may lead include 400 Gb Ethernet switching and campus market splines. 
  • Instead of relying on partnerships to plug portfolio gaps, Arista might be able to make accretive acquisitions in adjacent markets that could catalyse growth in areas such as analytics, access points, and security.

Company Profile 

Arista Networks is a software and hardware provider for the networking solutions sector. Operating as one business unit, software, switching, and router products are targeted for high-performance networking applications, while service revenue comes from technical support. Customer markets include data centers, enterprises, service providers, and campuses. The company is headquartered in Santa Clara, California, and generates most of its revenue in the Americas. It also sells into Europe, the Middle East, Africa, and Asia-Pacific.

(Source: Morningstar)

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

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

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

JBT should benefit from consumer preference for environmentally friendly packaging options

Business Strategy and Outlook 

Both of JBT’s segments will benefit from growth in the global middle class. The middle class will approximately double by 2030, and the Asia-Pacific region will be a significant contributor to that growth. This helps JBT FoodTech because per capita meat consumption in APAC has traditionally and significantly lagged that of Europe and North America. North America’s per capital meat consumption is about three and a half times that of APAC, but the gap narrows during the five-year explicit forecast. Overall global meat consumption is also on the rise, as people have become more conscious of protein intake in their diet. The ready-to-eat market will safely grow in the high single digits over the medium term. Young consumers prize this type of food for convenience and as an easy alternative to everyday and conventional three-meal dining. Offsets to protein technology forecast include a rising prevalence of livestock disease. Furthermore, not all APAC countries, like India, will converge toward Western dietary trends. Nevertheless, China will remain the single-biggest market and should account for nearly 30% of incremental demand.

Liquid foods packaging trends should benefit from advancements in packaging standards, escalating demand for packaged foods generally, increased e-commerce, as well as high demand for eco-friendly and lightweight packaging. JBT should benefit from consumer preference for environmentally friendly packaging options since its solutions can cut down on waste, among other interventions. Additionally, the air cargo growth will be a strong driver for JBT’s airport equipment, along with general infrastructure spending for aging equipment. Also, the ecommerce market’s size will greatly increase over the medium term and that will boost air cargo demand. Finally, getting passengers on board safely has garnered increased attention among airport authorities in recent years. This trend will resume as global air travel continues to recover

Financial Strength

 JBT is on decent financial footing and once again assigned the firm a moderate credit risk rating. As of the end of 2021, net debt/EBITDA was nearly 2.5 times, in line with multi-industry peers, but elevated relative to historical levels. That said, the firm has relatively low capital expenditures requirements (nearly 3% of sales), and free cash flow conversion sits at about 150% after a paltry mid-60s in 2019. It is not expected a repeat of 2020 levels, strong free cash flow conversion over the long term, with greater linearity in the conversion rate. The conversion will dip below 100% in 2022. As of the end of 2021, the interest coverage ratio (EBIT/interest expense) remains over 18 times, and JBT can service its financial obligations over the long run. As of the end of 2021, the firm’s pension fund was underfunded by $56 million, which reduces the fair value estimate by $2 per share. Long-term debt was nearly $675 million as of the end of 2021 (the firm has no short-term debt), versus cash on hand of nearly $80 million, of which about 75% is unrestricted and not needed to operate the business.

Bulls Say’s

  • JBT will benefit from the consumer preference for value- added foods, including clean labels and organics. 
  • The market fails to appreciate the positive impact from the commercial aerospace recovery and the ensuing operating leverage JBT will enjoy from a return of volume. 
  • After taking a pause during the uncertainty of the pandemic, JBT will likely look to deploy capital in M&A once again.

Company Profile 

JBT is a mid-cap diversified industrial conglomerate that spun out of FMC Technologies in August 2008. Over half of JBT’s sales are made in the United States. The firm operates through two segments: JBT Foodtech and JBT Aerotech. Foodtech provides both customized and turnkey industrial solutions for the food and beverage industry, including a large variety of protein processing and packaging solutions, as well as fruit and juice extraction and ready-to-eat solutions. Aerotech sells solutions to airport authorities, passenger airlines, airfreight firms, and defence contractors, among others. These solutions include gate equipment, as well as commercial and military cargo loading, aircraft dicing, and aircraft ground power and cooling system products

 (Source: MorningStar)

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

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

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Lennox entered the variable refrigerant flow market and introduced an emergency replacement product line to go head-to-head with Carrier

Business Strategy and Outlook 

Over the last decade, Lennox has capitalized on its efforts to gain market share and cut costs against a backdrop of improving end-market demand. Its margin expansion story has been remarkable, with adjusted operating margins rising from about 8% during the last sales peak in 2007 to about 15% in 2019 before the pandemic (excluding an insurance recovery benefit and adjusting for divestitures of lower-margin refrigeration businesses). Its expanding distribution network and product portfolio have helped Lennox gain market share, while low-cost manufacturing and product sourcing and more cost-efficient product designs helped reduce its cost base. Lennox-branded products are distributed through a company-owned distribution network, which is advantageous because Lennox has more control over sales strategy, marketing, and dealer support. Its store strategy has expanded its distribution network and improved product availability and fulfilment rates. In terms of new products, Lennox entered the variable refrigerant flow market and introduced an emergency replacement product line to go head-to-head with Carrier. Overall, a growing store footprint and product portfolio will help the firm better penetrate dealers and gain market share.

Strong residential HVAC demand was a bright spot in pandemic-stricken 2020-21. The outlook for residential construction remains constructive, but a more cautious residential replacement market outlook. While regulation changes (for example, energy efficiency standards) should be a tailwind, the replacement cycle is maturing. A favourable demand can be a backdrop for the commercial HVAC business, which can support at least mid-single-digit growth over the next few years. Over the short term, the business should benefit from spending tied to planned replacement projects that were deferred during the pandemic. There’s a heightened focus on air quality and energy efficiency as a longer-term secular opportunity for the commercial business.

Financial Strength

Lennox has a sound capital structure, and its free cash flow generation should easily support its debt-service requirements and future capital-allocation strategy. Lennox has approximately $1.7 billion of outstanding debt and $60 million of cash and short-term investments. The debt load equates to a net debt/2022 EBITDA ratio of about 2.2, which is modestly above management’s target ratio of 1-2. Lennox has a proven ability to generate free cash flow throughout the cycle. The company has generated positive free cash flow (defined as operating cash flow less capital expenditures) every year since its first full year as a public company in 2000. Given the firm’s reasonable use of leverage and consistent free cash flow generation, Lennox’s financial health is satisfactory.

Bulls Say’s

  • Lennox is well positioned to benefit from steady new residential construction and heightened demand for more energy-efficient commercial HVAC systems that improve air quality. 
  • Reinvestment in new product development and its distribution network should help the firm take share from competitors in residential and commercial markets. 
  • Lennox employs a shareholder-friendly capital allocation strategy. Since 2010, it has returned approximately $4.2 billion to shareholders via dividends and share repurchases, and its dividend has risen at an 18% CAGR.

Company Profile 

Lennox International manufactures and distributes heating, ventilating, air conditioning, and refrigeration products to replacement (75% of sales) and new construction (25% of sales) markets. In fiscal 2021, residential HVAC was 64% of sales, commercial HVAC was 21%, and refrigeration accounted for the remaining 15% of sales. The company goes to market with multiple brands, but Lennox is the company’s flagship HVAC brand. The Texas-based company generates most of its sales in North America.

 (Source: MorningStar)

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

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

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Magna Q2 Results Hit by Industry Headwinds, Tweaks 2022 Guidance; Slight FVE Increases to $82

Business Strategy & Outlook

Magna International is one of the largest, most diversified auto parts suppliers in the world. However, large and diversified is no guarantee of better returns for investors. While breadth in product and services can be advantageous with regard to cross-selling–commercial activities that bolster content per vehicle and market penetration—one can see only limited evidence that Magna’s diversified strategy has benefited investors in the form of higher margins and returns on invested capital. Many suppliers focus on a particular area of the vehicle. In sharp contrast, Magna’s capabilities are so broad that the firm could nearly design, develop, supply, and assemble vehicles all on its own. In 2021, the firm manufactured roughly 125,600 vehicles, generating $6.1 billion in revenue and $287 million in adjusted EBIT for a margin of 4.7%. While Magna’s Complete Vehicle segment has a growth opportunity with startup electric vehicle companies, the operation is highly capital intensive with limited margin, constraining return on invested capital. 

Diversifying into so many areas increases the risk that management resources become spread too thin, allocation of capital resources may be less than optimal, and the firm becomes less effective at developing expertise in any one area. One can be more confident in Magna’s ability to generate long-term excess returns on invested capital if its product offering was more focused but its customer base and geographical manufacturing footprint were better diversified. One would also like to see more disclosure regarding research and development, especially with certain parts of the business focused on powertrain electrification and autonomous technologies. Even though the Magna will benefit from these industry disruptive technologies, the degree of Magna’s product diversity dampens consolidated top-line growth and ROIC expansion potential from electric powertrain and vehicle autonomy. Even so, the firm’s healthy liquidity and balance sheet are able to support operations through severe industry downturns, such is the case with the coronavirus pandemic and microchip shortage.

Financial Strengths

Magna has a clean balance sheet with limited debt and ample liquidity. With average total debt/total capital at 11% for the past decade, interest expense is low, reducing risk to profits during a customer production downturn like that of the COVID-19 pandemic and the microchip shortage. Even so, the company has an inefficient capital structure, not taking advantage of the tax benefit of interest expense. With limited leverage on the balance sheet, Magna could make a relatively large acquisition if the right opportunity were to present itself. Magna’s capital needs have been primarily funded through equity and cash flow. The company has a $750 million undrawn unsecured revolving line of credit that was amended in December 2021 to mature in December 2022. Magna has a $1 billion U.S.-dollar denominated and a EUR 500 million euro denominated commercial paper program. Including 2021 year-end cash balance of $2.9 billion, total liquidity, excluding commercial paper programs, is $3.7 billion. Netting cash against debt, net debt/EBITDA at the end of 2021 was 0.3 times.

Bulls Say

  • High switching costs and significant barriers to entry enable sticky market shares. 
  • Incremental revenue from contracted new business provides revenue growth slightly above global industry production volume and should bolster operating leverage in the near term. 
  • As automakers consolidate purchases with fewer suppliers, large vendors such as Magna are in the best position to gain share because they can offer a wide range of parts, modules, and complete systems.

Company Description

Magna International prides itself on a highly entrepreneurial culture and a corporate constitution that outlines distribution of profits to various stakeholders. This automotive supplier’s product groups include exteriors, interiors, seating, roof systems, body and chassis, powertrain, vision and electronic systems, closure systems, electric vehicle systems, tooling and engineering, and contracted vehicle assembly. Roughly 46% of Magna’s revenue comes from North America while Europe accounts for approximately 43%.

(Source: Morningstar)

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