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Technology Stocks

Initiating on Tencent Music Entertainment, USD 8.60 FVE; Cloud Music, HKD 130 FVE; TME Our Top Pick

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Business Strategy & Outlook:

With over 600 million monthly active users, or MAU, Tencent Music Entertainment, or TME, is the largest music streaming platform in China. The firm monetizes through live streaming, a high margin business generating over 60% of revenue and over 100% of operating profit, while subscription-based music streaming remains loss-making. A low subscriber-to-user ratio in the mid-teen percentages offers a long runway for paying user growth in music streaming. With platforms putting more content, such as popular songs, behind the paywall, more users would subscribe, and fuel top-line growth. Potential revenue growth also comes from advertising, where the firm’s investments into long-form audio are likely to open up more ad inventory. Even though social entertainment (mainly video live streaming) contributes most of the firm’s revenue, it is believed that there will be minimal growth ahead given competition from Douyin and Kuaishou.

With China’s antitrust laws putting an end to TME’s exclusive music copyright agreements, it’s anticipated more competition for users. Its peer Cloud Music is aiming to bridge the content gap by signing with previously inaccessible labels. Despite competitive headwinds, the TME will remain the largest platform for music streaming, benefiting primarily from network effect and intangible assets that maintain user engagement and stickiness. The subscription prices are unlikely to go lower because: 1) competitors are making losses and have little incentive for price competition; and 

2) Chinese streaming platforms offer almost the lowest prices worldwide, so more discounts will be less effective in attracting users.

Unlike developed markets, the supply side of music in China is more fragmented, with just 30% of licensing from top five labels. As licensors sell their content on a mostly fixed cost basis, TME is well-positioned to see margin expansion as revenue grows.

Financial Strengths:

TME is financially sound. As of the end of 2021, the firm was sitting on a net cash position of CNY 22 billion, more than three times that of peer Cloud Music. Despite some near-term industry challenges, the firm to generate positive free cash flows over the next years. Taking advantage of the low interest environment, the company issued a total of USD 800 million (CNY 5 billion) senior unsecured notes at below 2% interest in 2020. 

The debt/equity ratio is running at a manageable 30%, and debt/EBITDA is maintained below 1.5 times as at the end of 2021. The firm is believed to maintain this capital structure. Given the positive free cash flow assumptions the firm can easily fulfill its debt obligations while simultaneously funding future investment initiatives. The business has been generating positive free cash flows since 2016. In 2021, it generated a free cash flow of CNY 3.5 billion. This is significantly better than peer Cloud Music, who will be burning through cash for the next couple of years.

Bulls Say:

  • Compared to Spotify, TME has plenty of room for subscriber growth that should come about as it moves more music content behind the paywall.
  • TME piggybacks off Tencent’s billion-plus user network. This relationship allows for better retention of users while attracting new ones.
  • By investing in independent artists and long-form audio, TME could better manage content cost over the long term.

Company Description:

TME is the largest online music service provider in China. It was founded in 2016 with the business combination of QQ Music (founded in 2005), Kuwo Music (founded in 2005) and Kugou Music (founded in 2004) streaming platforms. Tencent is the largest shareholder of TME with over 50% shares and over 90% voting rights held. TME also provides social entertainment services, including music live audio/video broadcasts and online concert services through the three platforms mentioned above, and online karaoke through an independent platform WeSing.

(Source: Morningstar)

General Advice Warning

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

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Technology Stocks

SAP SE: Cloud Continues to Deliver Strong Growth

Investment Thesis:

  • Leading market share positions in on-premise enterprise resources planning (ERP) and on-premise customer relationship management (CRM) markets with customers in over 180 countries and strong brand awareness. 
  • The market is undervaluing SAP’s CRM business (relative to its peer group such as Salesforce.com).
  • Support revenues and Cloud subscriptions provide recurring revenue, which gives SAP a defensive profile. 
  • Competent management team.
  • Strong operating and free cash flow generation with attractive dividend policy (payout ratio of at least 40%).

Key Risks:

  • Slower take-up for HANA and S/4HANA. 
  • Deteriorating sentiment if the economy and IT spending weakens. 
  • Market share loss in software revenue driven by cloud migration.
  • Aggressive M&A with risk of overpaying.
  • Additional opex spending dampening margin expansion. 
  • Key-man risk due to management changes.
  • Competition from other established players like Microsoft, Salesforce.com and Oracle.
  • The CFO Luka Mucic departure in March 2023 is a negative.

Key Highlights:

  • For FY22 management expects accelerating cloud revenue growth, supported by strong traction of SAP S/4HANA Cloud, leading to (in CC) Cloud revenue of €11.55–11.85bn (up +23-26%), Cloud and Software revenue of €25–25.5bn (up +4-6%) with share of more predictable revenue (total of cloud revenue and software support revenue) increasing +300bps to 78%, non-IFRS operating profit of €7.8–8.25bn (flat to down 5%), FCF of >€4.5bn (vs €5.01bn in pcp), effective tax rate (IFRS) of 25-28.0% (vs 21.4% in pcp) and an effective tax rate (non-IFRS) of 22-25.0% (vs 19.9% in pcp).
  • By 2025 management continues to expect total revenue of >€36bn with Cloud revenue of >€22bn, non-IFRS operating profit of >€11.5bn with non-IFRS cloud gross margin of ~80%, more predictable revenue share of 85%, and FCF of €8bn.
  • The Company announced a new share repurchase program with a volume of up to €1bn to service future share-based compensation awards, which is planned to be executed in CY22. 
  • Revenue growth of +19% in CC to $9.59bn with S/4HANA growing +47% in CC to $1.1bn.
  • Cloud backlog growing +32% (+26% in CC) to $9.45bn with S/4HANA cloud backlog up +84% (+76% in CC) to $1.71bn.
  • IFRS cloud gross margin improving +40bps to 67%. 
  • ‘RISE with SAP’ continued to gain traction, closing more than 650 customer deals in 4Q21, bringing total customer count to 1,300 since launch in 1Q21, and accelerated adoption momentum in cloud with SAP adding ~1,300 SAP S/4HANA customers (>2x the last four quarter average of 600) in the quarter (~50% customers were net new with win rate against competitors >70%), taking total adoption to more than 18,800 customers (out of which ~5,000 are S/4HANA cloud customers), up +18% over pcp, of which more than 13,100 (~70%) are live.

Company Description:

SAP SE (SAP) is a global software and service provider headquartered in Walldorf, Germany, operating through two segments: Applications, Technology & Services segment, and the SAP Business Network segment. The Applications, Technology & Services segment is engaged in the sale of software licenses, subscriptions to its cloud applications, and related services and the SAP Business Network segment includes its cloud-based collaborative business networks and services relating to the SAP Business Network (including cloud applications, professional services and education services). SAP is the market leader in enterprise application software and also the leading analytics and business intelligence company, with the Company reporting that more than 77% of all transaction revenue globally touches an SAP system.

(Source: Banyantree)

General Advice Warning

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

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Dividend Stocks

Chorus posted solid 1H22 Results; Dividend guidelines increased and announced share buyback

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.

Categories
Dividend Stocks

Inghams Group – The Board declared a fully franked Dividend of 6.5 cps, in line with the pcp, and Equates to Payout Ratio of 60.9%

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.

Categories
Dividend Stocks

Amadeus and GDS relationships to be the exception rather than the rule

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.

Categories
Dividend Stocks

Pact Group Holdings Ltd – The Board declared a 65% Franked Interim Dividend of 3.5cps, down -30%

Investment Thesis:

  • Solid market share in Australia and growing presence in Asia. Hence provides attractive exposure to both developed and emerging markets’ growth.
  • Valuation is fair on our forward estimates.  
  • Management appears to be less focused on acquired growth going forward, which means there is a less of a chance for the Company to make a value destructive acquisition. 
  • Reinstatement of the dividend is positive and highlights management’s confidence in future earnings growth.  
  • Focusing on sustainable packaging in an environmentally friendly market.

Key Risks:

  • Competitive pressures leading to further margin erosion.
  • Input cost pressures which the company is unable to pass on to customers.
  • Deterioration in economic conditions in Australia and Asia.
  • Emerging markets risk.
  • Poor acquisitions or not achieving synergy targets as PGH moves to reduce its dependency on packaging for food, diary, and beverage clients to more high growth sectors such as healthcare.
  • Adverse currency movements (purchased raw materials in U.S. dollars)

Key Highlights:

  • Revenue increased +3.7% to $927.2m, with Packaging and Sustainability up +7.4% driven by volume growth and the pass through of higher material and other input costs and Materials Handling and Pooling up +5.3% driven by growth in pooling and infrastructure demand and resilient hanger reuse service volumes, partially offset by -10.9% decline in Contract Manufacturing
  • Underlying EBITDA declined -8% to $151m with margin compressing by -200bps to 16.3% and underlying EBIT declined -16% to $83m with margin compressing by -210bps to 9%, primarily due to lower earnings in the Contract Manufacturing amid lower volumes and lags in recovering raw material costs. PGH saw almost flat earnings in Packaging & Sustainability and Materials Handling & Pooling as significant raw material and freight cost inflation was mitigated through strong pricing discipline and efficiency programs.
  • Underlying NPAT declined -25% to $39m and reported net loss of $21m amid net after-tax expense for underlying adjustments of $60m mostly related to non-cash impairments and write-downs in the Contract Manufacturing segment of $65m (after tax).
  • Operating cashflow declined -19% to $110.4m and FCF declined -72% to $13m.
  • Net debt increased +0.3% to $601m, driven by lower earnings in the Contract Manufacturing segment along with an increase in working capital, leading to gearing increasing +0.3x to 2.7x vs target range of <3.0x.
  • Liquidity remained strong with $288.9m in committed undrawn facilities, with the Company extending the maturity of the debt portfolio to an average of 3.4 years and introducing new lenders, increasing diversification and reducing refinancing risk.
  • The Board declared a 65% franked interim dividend of 3.5cps, down -30%

Company Description:

Pact Group Holdings Ltd (PGH) was established by Raphael Geminder in 2002 (Mr. Geminder remains a major shareholder with ~44% and is the brother-in-law of Anthony Pratt, Chairman of competitor Visy). Pact has operations throughout Australia, New Zealand and Asia and conceives, designs, and manufactures packaging (plastic resin and steel) for many products in the food (especially dairy and beverage), chemical, agricultural, industrial and other sectors.

(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.

Categories
Dividend Stocks

Link Administration Holdings Ltd to Maintain its Dividends and Reduce its Debts

Business Strategy and Outlook

Link Administration has created a narrow economic moat in the Australian and U.K. financial services administration sectors via its leading positions in fund administration and share registry services. Client retention rates exceed 90% in both markets, underpinned by inflation-linked contracts of between two and five years. The capital-light nature of the business model should enable good cash conversion, regular dividends, and relatively low gearing. Earnings growth prospects are supported by organic growth in member numbers, industry fund consolidation, and continued outsourcing trends. The company was formed via numerous acquisitions made since 2005 under the ownership of private equity firm Pacific Equity Partners, which sold its remaining holding in the company in 2016. 

It is considered the Australian fund administration business, which constitutes around a third of group revenue, to be the strongest of Link’s businesses. Link usually comprises around three fourths of fund administration customer costs, which creates material operational and reputational risks to switching providers. Contract lengths of between three and five years, along with six to nine months of lead time to change provider, also create barriers to switching. Switching costs are evidenced by Link’s recurring revenue rate of around 90% and client retention rate of over 95%. Six of Link’s 10 largest clients have been with the company for over 20 years. 

Link’s only significant competitor in fund administration is Marsh & McLennan-owned Mercer, which has a 10% market share following its acquisition of Pillar, previously group revenue, grows at around 4% per year, comprising 1.5% population growth and 2.5% inflation. Experts assume corporate markets revenue grows at 3% per year, reflecting inflation, and assume no market share gains due to the strength of major competitor Computershare. According to analysts EBIT margins grow from 12% in fiscal 2021 to 21% by fiscal 2031 partly due to cost-cutting. Over the next decade, an EPS CAGR, excluding amortisation of acquired intangible assets, of 9%. The capital-light nature of the business model means it is anticipated cash conversion to be strong, enabling dividends to be maintained and net debt gradually reduced, assuming no further acquisitions. Experts discounted cash flow valuation assumes a weighted average cost of capital of 7.7%.

Financial Strength

Link’s balance sheet is in good shape with a net debt/EBITDA ratio of around 2.6 as at Dec. 31, 2021, which is within the company’s target range of 2 to 3. From an interest coverage ratio perspective, Link has a manageable interest coverage ratio of around 14.

Bulls Say’s

  • It is alleged Link’s EPS to grow at a CAGR of 9% over the next decade, driven by a revenue CAGR of 6% per year, in addition to cost-cutting and operating leverage. 
  • Experts base case assumes Link’s Australian fund administration market share grows by 2.5 percentage points to 32.5% over the next five years. 
  • The capital-light nature of the business model should enable regular dividends, and low financial leverage creates the opportunity for debt-funded acquisitions.

Company Profile 

Link provides administration services to the financial services sector in Australia and the U.K., predominantly in the share registry and investment fund sectors. The company is the largest provider of superannuation administration services and the second-largest provider of share registry services in Australia. Link acquired U.K.-based Capita Asset Services in 2017; this provides a range of administration services to financial services firms and comprises around 40% of group revenue. Link’s clients are usually contracted for between two and five years but are relatively sticky, which results in a high proportion of recurring revenue. The business model’s capital-light nature means cash conversion is relatively strong. 

(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.

Categories
Technology Stocks

LNK results reflects Operating NPATA of $55.9m for 1H22, up +9% relative to the pcp, and included a $19.5m contribution from PEXA

20025825 - closeup image of businessman drawing 3d graphics

Investment Thesis:

  • LNK is currently under a takeover offer by D&D, which the LNK Board has unanimously recommended. 
  • Leveraged to ongoing outsourcing of administration by retail super funds.
  • LNK still has exposure to any further upside in PEXA’s valuation. 
  • New contract wins in Fund Administration and increased market activity.
  • Successfully delivering on its offshore expansion story. 
  • Efficiency benefits from the cost out program. 
  • Clarity around Brexit will remove uncertainty / potential discount assumed in current valuation / share price.  
  • Value accretive bolt-on acquisitions. 
  • Favourable currency movements. 

Key Risks:

  • LNK does not receive all the regulatory approvals for the current takeover offer from D&D. 
  • Lower market activity and business / investor confidence. 
  • Loss of major client contract(s) in Fund Administration.
  • Adverse changes in super regulatory environment – e.g. super account consolidation.
  • Lack of product development.
  • Adverse currency movements.

Key Highlights:

  • Link Administration Holdings Ltd (LNK) reported strong 1H22 results ahead of expectations, with the Company upgrading its FY22 guidance.
  • LNK’s results reflect – Operating NPATA of $55.9m for 1H22, up +9% relative to the pcp, and included a $19.5m contribution from PEXA.
  • Statutory Loss of $81.7m was due to a non-cash impairment charge of $81.6m related to the BCM business and rationalisation of LNK’s premises footprint.
  • According to management, the GTP remains on track to deliver the committed gross annualised savings of $75m by the end of FY22.
  • For 1H22, the GTP delivered gross savings of $14.9m (including D&A).
  • D&D takeover offer unanimously recommended by LNK Board – total consideration of $5.68 per share.
  • As per LNK’s announcement on 22 December 2021, the Company has entered a scheme of implementation deed with Dye & Durham (D&D) to have 100% of its shares acquired at $5.50 per share plus a fully franked 3cps interim dividend (which declared at the 1H22 results)
  • Investors may also receive a further 15cps if LNK reaches an agreement to sell its Banking and Credit management (BCM) business prior to or up to 12 months after the implementation of the scheme. LNK shareholders are expected to vote on the scheme in May 2022.
  • BCM sales does not proceed and investors miss out on the additional 15cps value.
  • There are contingencies in the offer, which also relates to the Woodford Matters (if there are fines before the completion of the scheme this may delay or put the takeover into jeopardy).

Company Description:

Link Administration Holding Ltd (LNK) is the largest provider of superannuation fund administration services to super fund in Australia. Further, the Company is also a leading provider of shareholder management and analytics, share registry and other services to corporates in Australia and globally. The Company has 5 main divisions: (1) Retirement & Super Solutions (RSS), (2) Corporate Markets (CM), (3) Technology & Operations (T&O), (4) Fund Solutions (FS) and (5) Banking & Credit Management (BCM). LNK was listed on the ASX in October 2015. 

(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.

Categories
Technology Stocks

Jack Henry & Associates: margins under pressure as company developed and migrated clients to a new card processing platform

Business Strategy and Outlook

Jack Henry remains committed to the idea that slow and steady wins the race. While its larger peers both completed big mergers in 2019 that expanded their operations into new areas, Jack Henry continues to build out its competitive position organically. Overall, it is seen this approach should allow Jack Henry to maintain its wide moat and continue to modestly outperform its larger peers. 

The company has not been without challenges recently. Jack Henry’s business is quite stable, with much of its revenue recurring under long-term contracts and related to essential services for banks and credit unions. Jack Henry and its peers saw only a modest impact from the financial crisis in 2008, which is likely was essentially a worst case for the industry from a macro perspective. However, growth stalled a bit as banks looked to reduce spending during the pandemic. But much of the decline in growth has come from a falloff in deconversion fees, given that M&A activity among banks declined significantly due to the uncertainty created by COVID-19. These fees fall almost entirely to the bottom line, and as such can have an outsize impact on margins and profitability. However, while this weighed on recent results, from a long-term perspective, holding onto more clients can only be construed as a positive. Management’s guidance for fiscal 2022 suggests a full return to normalized growth, and the stage seems set for this to occur. 

Jack Henry has generally outperformed its larger peers in terms of growth, and is believed for this to continue. The company notched up over 40 competitive core takeaways in fiscal 2021, suggesting that it continues to pick up incremental share, although the high switching costs around this service make this a very slow process. On the negative side, margins have been under some pressure recently as the company developed and migrated clients to a new card processing platform. It is held Jack Henry’s competitive position is a little weaker on this side, given its relative lack of scale, but at this point see this is a one-time issue and margins should rebound now that this initiative is complete.

Financial Strength

Jack Henry’s balance sheet is strong. Historically, the company has generally carried no or just a nominal amount of debt, and it had only $100 million in debt at the end of fiscal 2021. The company’s conservative balance sheet structure, along with the underlying stability of the business, creates significant flexibility in terms of returning capital to shareholders. While the company does pursue acquisitions, historically these have been limited to small, bolt-on deals that can be covered with free cash flow. Most of the company’s free cash flow is returned to shareholders, with dividends and share buybacks equating to about 90% of free cash flow over the past five years.

Bulls Say’s

  • The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts. 
  • Jack Henry’s organic approach to growth has allowed the company to build out a relatively streamlined set of products, which allows the company to concentrate its resources and maintain relatively strong margins. 
  • Jack Henry has outperformed its larger peers in terms of organic growth over time, suggesting the company is steadily improving its share.

Company Profile 

Jack Henry is a leading provider of core processing and complementary services, such as electronic funds transfer, payment processing, and loan processing for U.S. banks and credit unions, with a focus on small and midsize banks. Jack Henry serves about 1,000 banks and 800 credit unions. 

(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.

Categories
LICs LICs

PTM reported revenue of $128.7m with attractive dividend yield

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Investment Thesis

  • Trades on an attractive dividend yield.
  • PTM is in a position to attract net inflows as value oriented strategies may make a sustained comeback. 
  • Recent decision to reduce fees from 1.35% to 1.54%, represents ~9% decline in revenue. In our view, we expect further pressure on the funds management industry and fees (as a result of industry and super funds building inhouse capabilities and passive investing with significantly lower fees/asset allocators becoming more of the norm). 
  • Significant key man risk. Particularly poignant as Kerr Neilson has stepped down from CEO, and whilst he has not signaled plans to leave altogether, it remains a possibility.
  • New distribution channels present growth runways for PTM’s core funds.
  • Transition risk as the new CEO takes over. 

Key Risks

  • Trades on an attractive dividend yield.
  • PTM is in a position to attract net inflows as value oriented strategies may make a sustained comeback. 
  • Recent decision to reduce fees from 1.35% to 1.54%, represents ~9% decline in revenue. In our view, we expect further pressure on the funds management industry and fees (as a result of industry and super funds building inhouse capabilities and passive investing with significantly lower fees/asset allocators becoming more of the norm). 
  • Significant key man risk. Particularly poignant as Kerr Neilson has stepped down from CEO, and whilst he has not signaled plans to leave altogether, it remains a possibility.
  • New distribution channels present growth runways for PTM’s core funds.
  • Transition risk as the new CEO takes over. 

1H22 result highlights

  • Fee revenue increased +2% over pcp to $133.6m, with Management fee revenues increasing +3% over pcp due to the increase in average FUM and changes in product mix (average fee up amid higher portion of retail FUM) partially offset by -32% over pcp decline in Performance fee revenues to $2.5m. Other income declined from a $35.7m gain in pcp to a $4.9m loss due to unrealized losses on seed investments. 
  • Expenses increased +15.8% to $43.2m, primarily driven by +39.6% YoY increase in share-based payments expense as share-based payments expenses normalized after being relatively low in pcp due to rights forfeited during that period, and +42.3% increase in business developments costs mainly due to advertising and the launch of the Platinum Investment Bond. 
  • NPAT declined -33.6% over pcp to $60m, primarily driven by unrealized losses on seed investments, including share of associates losses, which contributed losses before tax of $7.4m compared to income before tax of $35m in pcp. Excluding gains and losses on seed investments (net of tax), underlying NPAT declined -1.2% over pcp to $65.1m. 
  • FUM declined -6.4% over 2H21 to $22bn (down -7% over pcp), driven by net outflow of $900m and negative investment returns of $500m primarily from the Asia ex-Japan investment strategy ($400m). 
  • The Board declared a fully franked interim dividend of 10cps, down -16.7% over pcp and equating to annualized yield of ~7.4% (using 31 December 2021 share price of $2.70).

Company Profile

Platinum Asset Management (PTM) is an ASX-listed, Australian based fund manager which specializes in investing in international equities. PTM currently manages ~A$23.6bn. 

 (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.