Tag: Top Stocks

Business Strategy and Outlook

Domain offers exposure to favourable trends in the Australian real estate market, but with relatively low exposure to real estate price risk in the long term. The company has generated strong revenue growth in recent years, boosted by an increase in agents using its website, listings, premium listings, and acquisitions. However, similar growth is not expected from these factors in future, as it is projected that Domain now has near saturation of available agents and listings and as such, further acquisitions are not anticipated. 

Domain is expected to generate revenue growth primarily from growth within its residential division, and listings are projected to increase by at least 1%-2% per year, in line with population and dwelling growth over the long term. In addition, it is viewed that Domain can generate above-inflation growth in revenue per listing, as a result of above-inflation listing price growth and an increase in the proportion of premium listings on its website, from around 10% national penetration toward REA Group’s 20%. A revenue CAGR for the group of 12% is forecasted over the next decade. 

Domain currently generates a lower EBIT margin than REA Group and other leading Australian online listings websites; however, the company is expected to achieve margin expansion as a result of strong revenue growth and operating leverage. Although margin improvement is anticipated, a lower margin is forecasted for Domain in comparison to peers, as Domain is the number-two provider, whereas peers are all leading providers in their respective segments.

Financial Strength

Domain is in good financial health, which is partly attributed to the capital-light business model and expected cash flow strength. As with many software companies, most of Domain’s costs relate to employee costs, and the company does not require large capital expenditures to grow. The lack of capital requirements means cash conversion is usually high and cash flows are available for dividend payments and growth investments, such as acquisitions or investments in early-stage businesses. It also means that equity issuance is usually negligible, which means little or no dilution of existing shareholders. Domain is not expected to undertake large acquisitions, in part due to the lack of obvious large acquisition candidates but also due to the present opportunity to invest in and expand its core business.

Bulls Say’s

• Domain is projected to generate high revenue growth, primarily owing to an increase in revenue per listing as a result of an increase in premium listings. 
• Domain should benefit from Australian population growth of around 1%-2%, which should equate to a similar increase in dwelling numbers and therefore listings. 
• Domain’s diversification into real estate-related businesses, such as mortgage, insurance, and utility services, is likely to strengthen the firm’s competitive position by increasing switching costs, and could diversify earnings.

Company Profile 

Domain is an Australian real estate services business that owns real estate listings websites and print magazines, and provides real estate-related services. Domain was formed as a home and lifestyle section of newspapers owned by Fairfax Media Limited (ASX:FXJ) in 1996, and an associated residential real estate website, www.domain.com.au, was launched in 1999. Domain’s real estate listings website has grown to become its core business and the second-largest residential real estate website in Australia, after REA Group’s (ASX:REA) owned www.realestate.com.au. Newscorp (ASX:NWS) owns 60% of REA Group.

(Source: MorningStar)

General Advice Warning

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

Business Strategy & Outlook:

After emerging from outright government ownership ABN Amro is one of the simpler banks in Europe. It is essentially a retail and commercial bank with limited capital markets activities. Its strong retail deposit base supported above-average profitability until negative interest rates started to bite. Having a lending book dominated by fixed-rate mortgages does not help either. The long-duration lending book forces ABN Amro to use more expensive long-term funding in order to manage liquidity risk, which then compounds margin pressure in a declining interest-rate environment. ABN Amro offers investors exposure to the oligopolistic Dutch banking system where ABN Amro and its two main rivals hold more than 90% of all Dutch current accounts. This is in sharp contrast to the fragmented banking markets that are the norm in much of the eurozone. Historically this concentration supported higher levels of profitability for ABN Amro and its Dutch peers.

ABN Amro has a solid competitive position in Dutch retail banking with a 20% market share in Dutch personal current accounts and a 25% share of business current accounts. This provides ABN Amro with cheap, sticky funding and forms the base from which ABN Amro can cross-sell other products. In a negative interest-rate environment what should be a major competitive advantage has turned into a major headache. In a negative interest-rate environment banks earn negative interest on their surplus liquidity and with essentially a zero interest-rate floor on some of their deposits this leads to a margin squeeze. The injection of liquidity via monetary and fiscal interventions from central banks and governments following the coronavirus pandemic has just amplified this problem as banks are faced with even more deposits from clients flush with cash. ABN Amro cannot pass on negative interest rates to smaller depositors without damaging client goodwill. It is increasingly passing on higher costs to larger clients. Interest-rate hedges only provide protection against interest-rate volatility, not to a long-term decline in interest rates, especially not when rates go negative.

Financial Strengths:

Even after taking into consideration the more onerous capital guidelines under Basel IV ABN Amro is one of the best-capitalised banks in Europe. At the end of 2020 ABN Amro indicated that on a Basel IV basis it has a common equity Tier 1 ratio of over 15%, compared with its internal target of 13%. With an enviable retail deposit base ABN Amro is one of the banks in Europe with the soundest liquidity profile. Retail deposits tend to be sticky as retail depositors are less likely to move to other banks in the search of higher yields. Wholesale funding are much more likely to disappear during periods of stress in the funding markets. Wholesale funding makes up only around 26% of ABN Amro’s total funding.

Bulls Say:

• ABN Amro is one of the three leading banks in the oligopolistic Dutch banking sector.
• It has an attractive funding mix with low reliance on wholesale funding.
• It has a simple, clear, and focused business model and strategy.

Company Description:

ABN Amro Bank is a Dutch bank, and the Netherlands accounts for around 90% of its operating profit. Operationally, retail and commercial banking contributes the bulk of its operating profit, while ABN Amro continues to reduce its exposure to corporate and investment banking. It views private banking as one of its key growth areas.

(Source: Morningstar)

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Business Strategy & Outlook:

Kingfisher is a leading home improvement retailer operating under the retail banners of B&Q and Screwfix in the U.K and Brico Depot and Castorama in France, while also expanding in other European markets. Kingfisher has attempted multiple strategies to optimize its product offering and leverage its leading position in the French and British home improvement market with little success delivering excess economic returns. While the coronavirus pandemic has provided unexpected tailwinds for Kingfisher, such as increases in do-it-yourself activity and online penetration rates, operating margins remain below U.S peers, who enjoy greater scale and are thus able to operate at a more efficient cost base. Prior to the pandemic, Kingfisher had not reported an increase in like-for-like sales since fiscal 2017. The COVID-19-driven home improvement trend is unlikely to be maintainable as customers shift expenditures toward services as governments no longer impose lockdown restrictions and rising interest rates lowers accessibility to homeownership, a major driver of home improvement activity.

With consumer demand currently elevated, greater emphasis is placed on Kingfisher’s ability to grow market share through investments into its digital capabilities and own-exclusive brands, especially from trade customers who visit stores more frequently and have a larger basket size. Kingfisher’s retail banners in France are dilutive to the group and will benefit from the reorganization of its logistics operation in the region, which will reduce transportation costs and improve customer service. Self-help measures such as optimizing Kingfisher’s store footprint, lease renegotiations at lower rates and reversing stock inefficiencies will free up cash that will be returned to shareholders via a dividend payout ratio of approximately 40%.

Financial Strengths: 

Kingfisher is in a sound financial position. The group ended fiscal 2022 with a net debt/EBITDA ratio (including lease liabilities) of 1.0 times, below its 2.0-2.5 target range, which provides a cushion for any potential slowdown in DIY activity in the future. The group is also one of the few around with a pension surplus. Kingfisher has very little funded debt, which is comfortably covered by the group’s cash balance.

Kingfisher’s main source of debt are lease liabilities, consisting of GBP 2.4 billion within its net debt position of GBP 1.6 billion as at fiscal 2021-22. Approximately 40% of Kingfisher’s store space is owned (mostly in France and Poland), which provides financial flexibility, as these assets can be monetized through sale and leaseback transactions, a tool Kingfisher has begun to use. Better inventory management, which lags peers, would also improve Kingfisher’s cash generation.

Bulls Say:

• Demand for Kingfisher’s home improvement products stands to benefit from aging housing stock in the U.K. and France, as well as people spending more time indoors during the pandemic.
• Self-help opportunities at Kingfisher should help increase operating margins by optimizing its store space footprint and improving logistical inefficiencies across its French operations.
• As the second-largest home improvement retailer in Europe, Kingfisher has the opportunity to better leverage its size to drive costs down and use its customer knowledge to develop its own products.

Company Description:

Kingfisher is a home improvement company with over 1,470 stores in eight countries across Europe. The company operates several retail banners that are focused on trade customers and general do-it-yourself needs. Kingfisher’s main retail brands include B&Q, Screwfix, and TradePoint in the United Kingdom and Castorama and Brico Depot in France. The U.K. and France are Kingfisher’s largest markets, accounting for 81% of sales. The company is the second-largest DIY retailer in Europe, with a leading position in the U.K. and a number-two position in France.

(Source: Morningstar)

General Advice Warning

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

Investment Thesis 

• CNU trades on a dividend yield of ~4.7%.
• Once UFB capex and capex on fiber network significantly fades, CNU is very cash generative and its capex will revert to maintenance spend.
• Significant barriers to entry with high capex required for new competitors.
• Benefits from population growth (i.e. potential for more connections) and increasing bandwidth requirements from trends such as end-users watching TV on the internet or increasing content on the internet. 
• Fiber remains the best possible broadband product and has become the preferred broadband product of choice for customers. CNU announced in January 2017 that CNU reached an agreement with the government to take fiber to ~200,000 more customers (on top of the 1.1m already planned for first year UFB roll-out). CNU commenced UFB2 rollout in July 2017, which is expected to complete around December 2024. This would result in high penetration with ~85% of NZ population with access to fiber by 2024. The NZ government provided an additional up to ~NZ$291m in funding (whereas other fiber companies received ~NZ$16m in funding to extend fiber to ~33k more premises).

Key Risks

• Potential changes to management and strategy with new incoming Kate McKenzie.
• Increasing prevalence in usage of wireless networks over fiber networks, especially in regional NZ, where there is either poor or no broadband coverage.
• Any capital expenditure blowout.
• Network outages or reliability issues.
• Regulatory risk. 

1H22 Results Highlights Relative to the pcp: 

• Revenues increased +1% to $483m largely due to gains from ongoing network optimisation programme. 
• Operating expenses declined -9.3% to $136m amid ongoing focus on reducing discretionary costs and decline in some expense lines due to Covid-19 restrictions. 
• EBITDA increased +5.8% to $347m, which combined with +2.4% increase in D&A expense amid growth in network asset base and -7.8% decline in interest costs due to the refinancing of debt at lower rates in 1H21 (weighted average effective interest rate declined -30bps to 3.7%) delivered NPAT of $42m, up +55.6%. 
• Capex declined -25.5% to $263m with fibre remaining the dominant category of spend at 85% and copper related expenditure continuing to trend downwards. 
• Credit metrics improved with net debt to EBITDA declining to 4.03x from 4.24x at 1H21, and well within bank covenants (financial covenants require senior debt ratio to be no greater than 4.75x) and BBB/Baa2 rating by S&P/Moody.

Dividend guidance increased + share buyback announced

Given the finalisation of crucial inputs by Commerce Commission for the new regulatory framework together with the subsequent increase in credit thresholds for CNU by ratings agencies (Moody’s and S&P recognise that the new regulatory regime now provides CNU with some certainty over the revenues that can be earned from the fibre network), management upgraded their FY22 dividend guidance by +34.6% to 35cps and forecast FY23 dividend to be a minimum of 40cps and the FY24 dividend a minimum of 45cps. CNU also announced a share buyback of up to $150m (might be suspended if management identifies more accretive opportunities for shareholder value to be realised). 

Company Profile

Chorus Ltd (CNU) is a dual-listed (ASX and NSX) wholesale and retail telecommunications company based in New Zealand. CNU maintains and builds the Chorus local access network made up of local telephone exchanges, cabinets and copper and fiber cables throughout New Zealand.

(Source: Banyantree)

General Advice Warning

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

Investment Thesis:

• Trading on undemanding multiples and below our valuation. 
• Potential for an improvement in the pricing environment. 
• Quality management team who has managed disruptions for the Covid-19 pandemic well. 
• Quality assets and operates as Australia and New Zealand’s largest integrated poultry producer.
• Project Accelerate has proven successful in driving automation and labour productivity, which supports earnings uplift despite decrease in revenue.  
• Procurement initiatives implemented with benefits in line with expectation.
• Investing to increase capacity and capability across the business in Australia and New Zealand plants.
• Capital management initiatives are possible with a strong balance sheet.

Key Risks:

• Re-negotiation of key contracts with large customers on unfavourable terms. 
• Increase in feed and electricity costs, which may be pushed to customers through market price increases, reducing competitiveness. 
• No news on the appointment of a new CEO creates uncertainty. 
• Customer concentration risk in QSR (Quick Service Restaurants) and Supermarkets. 
• Susceptible to exotic disease breakouts, impacting ING’s ability to supply poultry products. 
• Significant reduction in volume and quality from parent stock supplier.
• Material interruptions to ING’s complex and interlinked supply chain.

Key Highlights:

• Group core poultry sales volumes grew +5.6%, driven by strong volume growth of +6.5% in Australia.
• Statutory EBITDA of $220.4m, and Underlying EBITDA of $222.4m, was up +2.2% and +1.7%, respectively.
• Statutory NPAT of $38.4m, up +8.8% and Underlying NPAT of $39.7m, up +5.9%
• Cash flow from operations of $186.6m, was up +4.7%. Cash conversion ratio of 83.5% reflects seasonal working capital cycle and in-line with the pcp.
• ING retained a solid balance sheet with net debt of $264.6m and leverage of 1.3x, a significant reduction from 1.7x in the pcp.
• Total capital expenditure of $24.0m was lower than the pcp, reflecting completion of hatchery projects, ongoing project disruptions caused by Covid-19 lockdowns and delays in equipment being shipped.
• The Board declared a fully franked dividend of 6.5 cps, in line with the pcp, and equates to payout ratio of 60.9% of Underlying NPAT post AASB 16 adjustments, which is at the lower end of ING’s 60 – 80% target range.
• In Australia segment, Core poultry volumes grew +6.5% to 203.4kt, despite Covid-19 lockdowns and challenging market conditions. Revenue grew +1.9% driven by core poultry revenue growth of +2.2%, which grew despite weak pricing across the Wholesale channel due to excess supply, partially offset by feed revenue, declining -2.0% as customers transition supply away in preparation for closure of the ING’s WA Feedmill. Underlying EBITDA declined -0.3% to $185.1m, reflecting a lower Intercompany royalty charge, reduced by $3.2m.
• In New Zealand segment, Core poultry volumes were flat at 33.7kt, as Covid-19 lockdowns were reintroduced. Core poultry revenue increased +3.6%, due to price increases applied across all channels to help offset higher feed costs and inflationary pressures related to supply chain disruption. Underlying EBITDA of $19.1m increased $3.3m versus the pcp, with the change to intercompany royalty charge accounting for $3.2m.

Company Description:

Inghams Group Ltd (ING) is Australia and New Zealand’s largest integrated poultry producer. The Company produces and sells chicken, turkey and stock feed that is used by the poultry, pig, dairy and equine industries. 

(Source: Banyantree)

General Advice Warning

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

Business Strategy and Outlook

While Amadeus still stands to see material near-term corporate and European demand headwinds from the coronavirus and geopolitical conflict, it is aniticipated its leadership position in global distribution systems, or GDS, to endure during the next several years, driven by its leading network of airline content and travel agency customers as well as its healthy position in software solutions for these carriers and agents. Amadeus is the largest of the three GDS operators (narrow-moat Sabre is number two, followed by privately held Travelport) that control nearly 100% of market volume. 

Amadeus’ GDS enjoys a network effect (source of its narrow moat). As more supplier content (mostly airline content) is added, more travel agents use the platform; as more travel agents use the platform, suppliers offer more content. This network advantage is solidified by technology that integrates GDS content with back-office operations of agents and IT solutions of suppliers, leading to more accurate information that is also easier to book and service the end customer with. The 2016 acquisition of airline IT company Navitaire and 2018 acquisition of hotel IT company TravelClick expanded Amadeus’ GDS network advantage through new customer integration, as Navitaire focuses on low-cost carriers while the company’s existing Altea division focuses on full-service carriers, and TravelClick has a midscale lodging presence versus Amadeus’ legacy hotel offering, which focuses on enterprises. 

Replicating a GDS platform entails aggregating and connecting content from hundreds of airlines to a platform that is also connected to travel agents, requiring significant costs and time. Still, although it is viewed GDS advantages as substantial, technology architechtures like that of eTraveli (set to be acquired by narrow-moat Booking Holdings in early 2022), enable end users to access not only GDS content but supply from competing platforms, which could take some volume from GDS operators. Also, GDS faces some risk of larger carriers and agencies direct connecting, although it is likely these relationships to be the exception rather than the rule.

Financial Strength

While near-term industry travel demand remains below prepandemic marks, Amadeus’ balance sheet is clearer. Amadeus entered 2020 with just 1.4 times net debt/EBITDA, and it is projected it has enough liquidity for four years even at near zero demand levels. Amadeus has taken aggressive actions to shore up its liquidity profile. In March 2020, Amadeus began to cut costs and secured an additional EUR 1 billion one-year bridge loan, in addition to the undrawn EUR 1 billion revolver it already had. In April 2020, the company raised EUR 1.5 billion with a EUR 750 million equity offering (at a 5% discount to closing stock prices) and a EUR 750 million convertible note (at a strike price 40% above closing stock prices). In May 2020, Amadeus raised EUR 1 billion in debt at interest rates of 2.5%-2.9%. It is alleged banking partners to provide any additional needed funding, given Amadeus’ sizable network, switching costs, and efficient scale advantages that underpin its narrow moat.Net debt/EBITDA increased to 5.5 times in 2021, due to lower demand resulting from COVID-19, but it is foreseen a return to within management’s 1-1.5 times target range by 2023. Although about EUR 2.7 billion of the company’s EUR 4.3 billion in long-term debt matures over the next four years, its low leverage and stable transaction-based model in normal demand environments should not present any financial health concerns. It is projected Amadeus will generate EUR 7 billion in free cash flow (operating cash flow minus capital expenditures) during 2022-26.

Bulls Say’s

• The company’s GDS network hosts content from most airlines and is used by many travel agents, resulting in significant industry share. Replicating this network would involve meaningful time and costs. 
• The network advantage is supported by new products and technology that further integrate airlines and agents into its GDS platform. The company’s Navitaire, AirIT, and TravelClick acquisitions aid this expanding technology and integration reach. 
• The business model is driven by transaction volume and not pricing, leading to lower cyclical volatility.

Company Profile 

Among the top three operators, Amadeus’ 40%-plus market share in air global distribution system bookings is the largest in the industry. The GDS segment represents 56% of total prepandemic revenue (2019). The company has a growing IT solutions division (44% of 2019 revenue) that addresses the airline, airport, rail, hotel, and business intelligence markets. Transaction fees, which are tied to volume and not price, account for the bulk of revenue and profits. 

(Source: MorningStar)

General Advice Warning

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