Tag: Top Stocks

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Dividend Stocks

Uniti Capitalizing In Its Niche (Fiber)

Business Strategy and Outlook

With its lease renegotiation with Windstream (which makes up about 60% of Uniti revenue and over 80% of EBITDA) now finalized, Uniti is on much more stable financial footing and can continue on the path it was on prior to the Windstream uncertainty, maintaining itself with reliable returns and cash flow from Windstream while diversifying its business and adding more indefeasible rights of use agreements on its fiber, which carry long-term certainty and virtually no operating costs.

Diversification has come primarily via acquisitions and fiber network construction, which spawned the firm’s fiber infrastructure segment, where Uniti leases dark and lit fiber and small cells to wireless carriers and other enterprises. While it is generally skeptical about the economics of such businesses, it is in view Uniti as better positioned than many competitors because it focuses on second- and third-tier cities, where it is not supported competition is quite as intense. For example, Crown Castle explicitly says its footprint covers only the largest U.S. cities. In addition, the major cable providers in the United States are absent over much of Uniti’s footprint. It is alleged fiber use to continue growing substantially given constantly increasing data consumption across wired and wireless networks, and it is likely Uniti can capitalize in its niche.

It is also seen Uniti’s original leasing business, where it has engaged in sale-leaseback transactions to buy other companies’ fiber and immediately lease it back at attractive rates, but it is unconvincing it can materially grow beyond Windstream. It is not foreseen Uniti adds much value beyond providing capital, so it is held virtually any firm with access to cheap financing can compete. As such, it is anticipated suitors will compete on price, and finding sizable deals at attractive rates will be difficult.

Financial Strength

Uniti is a highly leveraged company, with net debt of 5.8 times adjusted EBITDA at the end of 2021 and a debt/capital ratio of over 100%. The resolution of the Windstream lease renegotiation significantly improves Uniti’s financial position and makes it unlikely to be in near-term danger of bankruptcy, but it still has substantial risk, especially if stress in the financial markets results from a global economic downturn. In addition, effects from the Windstream lease amendment remove flexibility Uniti needed to execute its diversification and expansion strategy. Uniti cut its quarterly dividend from $0.60 to $0.05 in March 2019 and has since raised it to $0.15. It is likely to raise it only marginally, which it needs to do to continue qualifying as a real estate investment trust. With the reduced dividend level, it is held the firm can make the required interest and principal payments on its debt while maintaining a debt/EBITDA ratio of about 6.0. The firm has no significant debt maturities until 2023, when more than $1 billion, or about 20% of its total debt, comes due. Beyond survival, it is likely Uniti’s weak financial position inhibits its ability to operate as it had planned. It was already highly leveraged, and it is anticipated it intended to rely on equity issuance to fund expansion and diversification. If its stock remains depressed relative to prior years, which is justified if it loses a significant portion of Windstream revenue, it is likely it will lack currency needed to buy additional assets.

Bulls Say’s

  • Uniti’s renegotiation of its Windstream lease gives the ability to add new leases to existing fiber, which can be very lucrative, as it requires little new spending.
  • Uniti’s sale-leaseback transactions provide nearly 100% margins, require no spending or upkeep on Uniti’s part, and lock in high-return revenue streams for 15 years or longer.
  • There is less competition to provide fiber exists in the second- and third-tier cities where Uniti operates, and Uniti’s network will be in demand to facilitate evergrowing data transport needs.

Company Profile

Uniti is a REIT with about 130,000 route miles of fiber in the U.S., primarily in the Southeast. Uniti reports its business in two segments: leasing and fiber. Leasing currently makes up about two thirds of total revenue and consists mostly of Uniti’s master lease agreement with Windstream. Uniti was spun out of Windstream in 2015 with a substantial portion of Windstream’s network assets, and it immediately leased the entire portfolio back for Windstream’s exclusive use. Other leasing revenue stems from sale-leaseback transactions with other fiber holders. Uniti generates fiber revenue by leasing dark and lit fiber to wireless carriers and other enterprises. (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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Dividend Stocks

Challenger Ltd fully franked interim dividend of 11.5cps up by 21%

Investment Thesis

  • CGF is trading on fair valuation, with a 2-yr forward PE-multiple of 14.3x and price-to-book value of 1.0x. 
  • Exposure to an attractive retirement income market, with strong long-term growth tailwinds.
  • Near-term challenges are likely to be priced in at current valuations, in our view, with investor expectations reset lower. 
  • Solid capital position.
  • Further cost initiatives leading to reduction in the already low cost-to-income ratio.
  • Two complementary businesses both with leading market positions.

Key Risks 

  • Weaker than expected annuity sales growth within its Life (annuity) segment.
  • Structural and reputational detriments from the Royal Commission lasting longer than anticipated. 
  • Any increase in competition from major Australian banks in annuities.
  • Weaker than expected net inflows for the Funds Management segment (possibly from lower interest levels from financial planners/advisers/investors).
  • Weaker than expected performance of boutique funds within its Funds Management segment.
  • Lower investment yields.
  • Uncertainty over capital requirements of deferred lifetime annuities.

Fund Management

  • EBIT increased +28% to $45m driven by +26.4% increase in FUM-based fee income with average FUM up +26% and a steady FUM-based margin of 16.7bps, partially offset by -50% decline in performance fees and +15% increase in expenses. Funds Management ROE increased +600bps to 33.8%.
  • FUM increased by +20% to $109bn, with net flows reaching $900m, reflecting a strong contribution from retail clients, with momentum continuing into the start of 2H22 with the business securing a GBP1bn UK fixed income mandate.
  • Investment performance remained strong with 92%, 96% and 94% of FUM outperforming the benchmark over 3 years, 5 years and since inception, respectively.

Company Profile 

Challenger Ltd (CGF) is an Australian-based investment management firm managing $78.4 billion in assets as of December 2018. CGF operates two core segments: (1) a fiduciary Funds Management division; and (2) APRA-regulated Life division. Challenger Life Company Ltd (Challenger Life) is Australia’s largest provider of annuities.

(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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Technology Stocks

BorgWarner Positioned for Growth From Globally Ubiquitous Clean Air Regulations

price of btc is going to breakout

Business Strategy and Outlook

BorgWarner is well positioned to capitalize on industry trends arising from global clean air legislation, consumers’ demand for fuel economy, and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. BorgWarner is well positioned for the trends in the auto sector that will result in revenue growth in excess of the growth in global automobile demand. 

Turbochargers, one of BorgWarner’s products for which it commands an industry-leading market share and accounted for 24% of 2020 revenue, are a cost-effective way for OEMs to improve engine efficiency. Fuel-injection technology from the Delphi acquisition also improves efficiency. Combined, both technologies increase fuel economy, lowering tailpipe emissions. Dual-clutch transmissions, which contain eight or more gears, compared with older technology automatic transmissions equipped with four gears, can generate 5%-15% in fuel savings. Torque transfer devices enable all-wheel drive and four-wheel drive for globally popular sport utility and crossover vehicles.

Financial Strength

BorgWarner maintains a solid balance sheet and liquidity that, relative to many other parts suppliers, makes for strong financial health. Despite being acquisitive, the company has pursued a conservative capital strategy as total debt/total capital has averaged less than 15% over the past 10 years. Total adjusted debt/EBITDAR, which takes into consideration operating leases and rent expense, averaged less than 1 times over the same period. However, we think the company could have taken more advantage of the benefits of financial leverage without incurring the pitfalls of excessive debt.

The company refinanced a $251 million senior note that was due in September 2020. BorgWarner maintains a $2.0 billion multicurrency revolver that matures in March 2025. The company’s unsecured commercial paper program allows up to an aggregate $2.0 billion in principal amount outstanding. Total combined drawn borrowing between the revolver and commercial paper program is not permitted to exceed $2.0 billion. With the completed all-stock deal to acquire Delphi Technologies, trailing 12-month pro forma debt/EBITDA was 3.0 times. However, excluding the dramatic COVID-19 impacted second quarter and using the trailing 12-months EBITDA ending with the first quarter, BorgWarner proforma debt/EBITDA was 1.7 times, a relatively healthy result.

Bulls Say’s

  • Global clean air legislation enables BorgWarner’s top-line growth to exceed worldwide growth in demand for light vehicles. 
  • The popularity of sport utility and crossover vehicles around the globe supports growth in BorgWarner’s torque transfer technologies. 
  • Volkswagen, Ford, and Hyundai are BorgWarner’s three largest customers and, on average, make up about one third of revenue.

Company Profile 

BorgWarner is a Tier I auto-parts supplier with four operating segments. The air management group makes turbochargers, e-boosters, e-turbos, timing systems, emissions systems, thermal systems, gasoline ignition technology, powertrain sensors, cabin heaters, battery heaters, and battery charging. The e-propulsion and drivetrain group produces e-motors, power electronics, control modules, software, automatic transmission components, and torque management products. The two remaining operating segments are the eponymous fuel injector and aftermarket groups. The company’s largest customers are Ford and Volkswagen at 13% and 11% of 2020 revenue, respectively. Geographically, Europe accounted for 35% of 2020 revenue, while Asia was 34% and North America was 30%.

(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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Dividend Stocks

Commonwealth Bank Board declared a franked dividend of $1.75 per share

Investment Thesis

  • Trades at a 2.2x Price to Book, and dividend yield of ~4.0%, however the stock trades at a premium to its peer group. 
  • $2bn on-market buyback should support CBA’s share price.
  • Improving macroeconomic environment which may see favourable higher interest rate hikes.
  • Post Covid-19 expected low levels of impairment charges (especially as a low interest rate environment helps customers and arrears).
  • Potential pressure on net interest margins as competition intensify with other major banks.
  • Sector leading return on tangible equity.
  • A well-diversified corporate book.
  • Improving CET1 ratio, which may in due course provide opportunity to undertake capital management initiatives.

Bulls Says

  • Intense competition for loan, as overall market growth rate moderates. 
  • Trades at a premium to peer group, with high competition potentially eroding its ROE.
  • Major banks, including CBA, are growing below system growth (i.e. losing market share). 
  • Increase in bad and doubtful debts or increase in provisioning.
  • Funding pressure for deposits and wholesale funding (increased funding costs).
  • Regulatory and compliance risk
  • Australian housing property crash. 

1H22 Results Highlights

  • Statutory NPAT of $4,741m, up 26%. Cash NPAT of $4,746m, up +23% driven by strong operating performance, lower remediation costs and lower loan loss provisions on improved economic outlook, offsetting weaker margins.
  • Operating income of $12,205m, up 2%, on ongoing volume growth and improved volume driven fee income, partly offset by weaker net interest margin.
  • Operating expenses was largely flat at $5,588m in 1H22 with higher staff costs to support higher volumes offset by lower occupancy, IT and remediation costs. CBA’s cost to income ratio of 45.8% was an improvement from 46.7% in 1H21.
  • Net interest margin (NIM) was down 14 basis points to 1.92%. According to management, excluding the impact from increased lower yielding liquid assets, CBA’s NIM declined 5 bps on higher switching to lower margin fixed home loans, the impact of the rising swap rates due to market expectations of higher interest rates, and intense competition.
  • Loan impairment expense declined $957m to a benefit of $75m reflecting an improved economic outlook. Loan loss provisions remain significantly higher than the expected losses under the central economic scenario.

Company Profile 

Commonwealth Bank of Australia (CBA) is one of the major Australian Banks. Its key segments are retail, business and institutional banking, wealth management, New Zealand and Bankwest. Across these core segments, the bank provides services in retail, corporate and general banking, international financing, institutional banking, stock broking and funds management.

(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

Sysco To Launch Teams That Master In Numerous Cuisines (Italian, Asian, Mexican) That Will Enhance Market Share Gains In Ethnic Restaurants

Business Strategy and Outlook

It is anticipated Sysco possesses a narrow moat, rooted in its cost advantages. It is concluded that the firm benefits from lower distribution cost given its closer proximity to customers, complemented by scale-enabled cost advantages such as purchasing power and resources to provide value-added services to its customers. While COVID-19 created a very challenging environment, the food-service market has nearly fully recovered, with sales at 95% of prepandemic levels as of the end of 2021, and Sysco has emerged as a stronger player, with $2 billion in new national account contracts (3% of prepandemic sales) and a 10% increase in independent restaurant customers.

In 2021, Sysco laid out its three-year road map, termed “recipe for growth” which will be funded by the elimination of $750 million in operating expenses between fiscals 2021 and 2024. The plan should allow Sysco to grow 1.5 times faster than the overall food-service market by fiscal 2024. Sysco is investing to eliminate customer pain points by removing customer minimum order sizes while maintaining delivery frequency and lengthening payment terms. It improved its CRM tool, which now uses data analytics to enhance prospecting, rolled out new sales incentives and sales leadership, and is launching an automated pricing tool, which should sharpen its competitive pricing while freeing up time for sales reps to pursue more value-added activities, such as securing new business. Sysco is also developing the industry’s first customized marketing tool, harnessing its significant customer data to generate tailored messaging that should resonate with each customer. In pilots, this practice increased Sysco’s share of wallet. Further, Sysco has switched to a team-based sales approach, with product specialists that should help drive increased adoption of Sysco’s specialized product categories such as produce, fresh meats, and seafood. Lastly, Sysco is launching teams that specialize in various cuisines (Italian, Asian, Mexican) that should drive market share gains in ethnic restaurants. Looking abroad, Sysco has a new leadership team in place for its international operations, increasing the confidence that execution will improve.

Financial Strength

It is seen Sysco’s solid balance sheet, with $3.4 billion of cash and available liquidity (as of December) relative to $11 billion in total debt, positions the firm well to endure the pandemic. Sysco has a consistent track record of annual dividend increases, even during the 2008-09 recession and the pandemic. It is foreseen 5%-10% annual increases each year of Analysts’ forecast, maintaining its target of a 50%-60% payout ratio.Sysco has historically operated with low leverage, generally reporting net debt/adjusted EBITDA of less than 2 times. Leverage increased to 2.3 times after the fiscal 2017 $3.1 billion Brakes acquisition, and above 3 times in fiscals 2020 and 2021, given the pandemic. But it is anticipated leverage will fall back below 2 by fiscal 2023, given debt paydown and recovering EBITDA. Analysts’ forecast calls for free cash flow averaging 3% of sales annually over the next five years. In May 2021, Sysco shifted its priorities for cash in order to support its new Recipe for Growth strategy. It’s new priorities are capital expenditures, acquisitions, debt reduction when leverage is above 2 times, dividends, and opportunistic share repurchase. Its previous priorities were capital expenditures, dividend growth, acquisitions, debt reduction, and share repurchases. In fiscal 2022-24, as it invests to support accelerated growth, Sysco should spend 1.3%-1.4% of revenue on capital expenditures (falling to 1.1% thereafter). Sysco completed the $714 billion acquisition of Greco and Sons in fiscal 2021, and it is projected for it to invest about $100 million to $200 million annually on acquisitions thereafter. Finally, Analysts’ model $500 million-$600 million in annual expenditures to buyback about 1% of outstanding shares annually. It is foreseen as a prudent use of cash when shares trade below Analysts’ assessment of intrinsic value.

Bulls Say’s

  • As Sysco’s competitive advantage centers on its position as the low-cost leader, it is projected Sysco should be able to increase market share in its home turf over time. 
  • Sysco has gained material market share during the pandemic, allowing it to emerge a stronger competitor. 
  • Sysco’s overhead reduction programs should make it more efficient, enabling it to price business more competitively, helping it to win new business, and further leverage its scale.

Company Profile 

Sysco is the largest U.S. food-service distributor, boasting 17% market share of the highly fragmented food-service distribution industry. Sysco distributes over 400,000 food and nonfood products to restaurants (66% of revenue), healthcare facilities (9%), education and government buildings (8%), travel and leisure (5%), and other locations (14%) where individuals consume away-from-home meals. In fiscal 2021, 83% of the firm’s revenue was U.S.-based, with 8% from Canada, 3% from the U.K., 2% from France, and 4% other. 

(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
Shares Small Cap

Bapcor Ltd: Likely to Deliver Pro Forma Earnings In FY22

Shot of elegant smart businesswoman explaining a project to his colleagues with statistics on the computer on coworking place.

Investment Thesis:

  • Trading below our valuation. 
  • Fundamentals for the vehicle aftermarket continue to remain strong (with increase in second-hand vehicle sales; travellers seeking social distancing and hence moving away from public transport; with Covid lockdown measures in forced, more people are spending their holidays domestically utilizing their vehicles).
  • Significant opportunities within BAP to drive growth (expanding network; increase market share by leveraging BAP’s Victorian DC; enhance supply chain efficiencies; driven own brand growth).
  • Strong earnings growth profile. 
  • Further opportunity to grow gross profit margins from better buying terms with tier one and two suppliers. 
  • Significant distribution network across Australia to leverage from.
  • Ongoing bolt on acquisitions and associated synergies.
  • Growing BAP’s own brand strategy, which should be a positive for margins. BAP is on track to reach their 5-year targets to supplement market leading brands with BAP’s own brand products.
  • Weak macro story of leveraged Australian consumer and lower growth environment persisting.
  • Thailand represents a meaningful opportunity in our view. 

Key Risks:

  • Rising competitive pressures.
  • Value destructive acquisition. 
  • Rising cost pressures eroding margins (e.g. more brand or marketing investment required due to competitive pressures).
  • Given the high trading multiples the stock trades at, a disappointing earnings update could see the stock price significantly re-rate lower. 
  • Integration (and therefore synergies) of recent acquisitions underperform market expectations. 
  • Execution risk around Thailand. 

Key highlights:

BAP struggled against Covid-19 lockdowns and restrictions over 1H22, delivering revenue growth of +1.9% over pcp to $900.1m, with own brand sales percentage increasing across all segments, with revenue picking up during 2Q, in line with easing restrictions. Management expects to achieve strong growth in 2H22. 1H22 EBITDA fell -5.8%, impacted by the transition to its Victoria distribution centre and support provided to staff. The Company made some significant leadership changes, appointing former CFO Noel Meehan as the new CEO following CEO/Managing Director Darryl Abotomey’s retirement. BAP has ample balance sheet liquidity.

  • Capital management. (1) The Board declared a fully franked interim dividend of 10cps, up +11.1% over pcp. (2) The balance sheet remained strong with ample liquidity with cash increasing +101.5% over 2H21 to $79.8m and net debt of $203M (up +23.7% over 2H21) leading to a leverage ratio of 1.0x, providing the Company with significant financial flexibility to be able to respond rapidly to acquisition opportunities and continue to invest in high returning projects. (3) Management continued investments in locations to support Truckline and Autobarn networks, expanded geographic footprint with BAP now having a presence in over 1,100 locations throughout Australia, New Zealand and Thailand, and signed 2 acquisitions adding annualised revenue of $50m at mid-single digit EBITDA multiples (pre-synergies).
  • Supply chain. Management continued to develop group logistics capabilities, transitioning three largest warehouses in Victoria, Nunawading (Retail), Preston (Trade) and Derrimut (Wholesale) which represent 80% of volumes, to new consolidated distribution centre at Tullamarine, which is expected to deliver operating expense savings of $10m and inventory improvement of $8m. 
  • New CEO appointed. Following CEO and Managing Director Darryl Abotomey’s retirement, the Company has appointed former CFO Noel Meehan as the new CEO, with recruitment for a new CFO currently underway. In our view, this is a good outcome and more likely to lead to a stability in strategy.
  • Growing proportion of private label sales. Own brand sales percentage increased across all segments, with Bapcor Trade delivering 29.6% (up +50bps over 2H21), Retail delivering 33.9% (up +120bps over 2H21), Speciality Wholesale delivering 54.6% (up +130bps over 2H21) and New Zealand delivering 30.3% (up +40bps over 2H21), with the Company remaining on track to reach its 5-year targets to supplement market leading brands with BAP’s own brand products, which should be a positive for margins.

Company Description: 

Bapcor Ltd (BAP) is Australasia’s leading provider of aftermarket parts, accessories and services. The core businesses of BAP are: (1) Trade – Burson Auto Parts is a trade focused parts professional supplying workshops with all their parts and accessories. (2) Retail – Autobarn is the premium retailer of auto accessories and Opposite Lock specializes in 4WD accessory specialists. (3) Independents – supporting the independent parts stores via the group’s extensive supply chain capabilities and through brand support. (4) Specialist Wholesaler – the number 1 or 2 industry category specialists in parts supply programs. (5) Services – experts at car servicing through Midas and ABS. 

(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
ETFs ETFs

BetaShares FTSE RAFI Australia 200 ETF: A disciplined approach to rebalancing the portfolio with a contrain methodology

Tile letter on red rack in word ETF (abbreviation of Exchange Traded Fund) on wood background

BetaShares FTSE RAFI Australia 200 ETF QOZ offers distinctive exposure to Australian equities based on a fundamental index. QOZ aims to track the FTSE RAFI Australia 200 Index before fees and expenses. Conforming to a contrarian methodology, the index construction is driven by a four-factor method developed by US-based Research Affiliates. The five-year average of the four metrics (book value, sales, cash flow, and dividend) are used to build a portfolio with reliable but currently undervalued stocks.

Approach

QOZ aims to track the FTSE RAFI Australia 200 Index before fees and expenses. This index eliminates the traditional market-cap-weighted index approach where portfolio weight depends on share price. Instead, QOZ favours stocks with a larger “economic footprint.” The index comprises the top 200 companies listed on the ASX, as measured by four equally weighted fundamental measures: sales, cash flow, dividends, and book value. Five-year averages are used for the first three factors, with the latest available book value applied. Stocks are weighted based upon an equally weighted composite score of these four metrics. 

Portfolio 

Market-cap-weighted Australian equity benchmarks are dominated by large sectors and companies. A handful of very large financial services and materials companies compose a significant slice of the overall pie. QOZ shares these characteristics, but instead of weighting by market cap, it uses an index based on fundamental metrics in which stocks with bigger economic footprints (earnings, sales, dividends, and book value) receive more prominence. 

Performance

Value-titled strategies have faced difficult times over the past decade. The returns have been typically overshadowed by the conventional growth-oriented strategies. However, it should be noted that such factor skews undergo cycles and may see an upturn when the macroeconomic environment changes. As at December 2021, QOZ delivered an annualised five-year return of 8.2% against the S&P/ASX 200’s 9.8%. The year 2016 was a period of contrasting halves as valuations dipped in the first half and quickly raced back and beyond in the latter half. The fund significantly outperformed the broader index over this period, delivering returns of 18.3%. The rally continued in 2017, and the fund ended with over 11.3% returns during the year. In 2018, US-China trade wars surfaced, causing global unrest in the equity markets. As such, the fund witnessed a sharp drawdown in the year’s final quarter.

Company Profile 

Cimic is Australia’s largest contractor, providing engineering, construction, contract mining services to the infrastructure, mining, energy, and property sectors. The business structure consists of construction, contract mining, public-private partnerships, and property, along with 45%-owned Habtoor Leighton. Cimic has exited its Middle East business. ACS/Hochtief owns 76% of Cimic.

(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
Fixed Income Fixed Income

Western Asset Australian Bond Trust – Class M: Among the best in the Australian Bond

20025825 - closeup image of businessman drawing 3d graphics

Western Asset Australian Bond is a compelling choice for domestic fixed-interest exposure owing to its bestin-class team and straightforward approach. Anthony Kirkham, head of investment/portfolio manager, is the leader of this strategy, and we have high regard for his investment knowledge and skills.

Approach

The philosophy of the team is to identify mispricings within sectors and securities allocating active risk in areas in which it has conviction while ensuring the portfolio remains diversified to avoid singular themes being pervasive through the portfolio. The team takes account of global macro insight from the global investment strategy committee and overlays its domestic market knowledge to come up with a base-case expectation looking forward six to nine months depending upon their conviction. In addition to this, the team develops multiple upside and downside scenarios as a risk-management framework. 

Portfolio

The portfolio can invest across government, semi-government, supranational, credit, securitised assets, inflation-linked bonds, and cash. As of November 2021, over 40% of the portfolio was invested in investment grade corporate bonds, around 25% in semi-government issues, 20% in government, 10% in supranational, with a small amount of mortgage-backed and asset-backed securities. Active duration moved short relative to the benchmark around mid-2021 but came back in line with the index around year-end. Similar to most Australian bond managers, they entered 2021 overweight in credit, indicative of their opportunistic profile.

People

The fund is managed by a seasoned team of investors who remain dedicated to this strategy. The team is led by Anthony Kirkham, who has had more than 30 years of wider experience, including nearly two decades at Western Asset Management and leading this strategy since 2002. Kirkham has credit analyst, dealer, and portfolio manager experience working for Commonwealth Bank, Metway Bank, RACV Investments, and Citigroup. He is supported by Damon Shinnick, who is a portfolio manager with a focus on credit portfolios.

Performance

This strategy has performed well over the medium and long term, especially compared with peers. It has delivered returns above the Bloomberg AusBond Composite Index, net of fees, over the past decade. That is ahead of its target return of 75 basis points (gross of fees) over the benchmark and market cycle. A tracking error of 100 basis points is targeted. Perhaps more impressive, though, is that these results put the strategy’s flagship A share class in the first quartile of its Morningstar Category over the trailing three, five, and 10 years to December 2021. Sector allocations and credit exposure continue to drive performance.

(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

Arista Shining From High End Switching Demand Turned on as Cloud Data Centers Expand

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy and Outlook

Arista Networks has solidified its market presence through data center switching and software-based networking innovation, and it is alleged 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. 

It is seen 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 is held, allows the company to focus on its core competencies. 

Arista works closely with its core customers to optimize their networking ecosystems, which it is alleged, 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, It is viewed, that Arista is growing alongside key customers and that new ventures have expanded from core competencies.  It is held that 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

It is considered Arista to be 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. It is held that 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 catalyze 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)

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

Twilio’s software building blocks are constructing a cloud communications empire

Business Strategy and Outlook:

Twilio is a cloud-based communication-platform-as-a-service, or CPaaS, company offering communication application programming interfaces, or APIs, and prebuilt solution applications aimed at improving customer engagement. Through these APIs, Twilio’s platform allows developers to integrate messaging, voice, and video functionality into business applications. We believe narrow-moat Twilio has a long growth runway ahead as it continues to make strategic organic and inorganic investments to expand its platform. 

In a go-to-market model that focuses on empowering developers to utilize the APIs to build products in a highly customized fashion, Twilio has been able to expand into use-cases that would be difficult to penetrate otherwise. For widely sought-after use-cases, Twilio has developed solution applications, like Flex Contact Center, which combine various channel APIs into a unified interface to create use-case-specific solutions.

Financial Strength:

Twilio is in a healthy financial position. Revenue is growing rapidly, and the company is beginning to scale, while the balance sheet is in good shape. As of December 2021, the company had cash and short-term investments of $5.4 billion and a debt balance of $985.9 million. In March 2021, Twilio issued $1.0 billion of senior notes, consisting of $500 million of 3.625% notes due 2029, and $500 million of 3.875% notes due 2031. In June 2021, the company redeemed its prior convertible notes, due March 2023, in their entirety. Since raising approximately $150 million in its IPO in 2016, Twilio has completed several secondary offerings, recently announcing a $1.8 billion offering of its Class. A common stock in 2021.Twilio has yet to achieve GAAP profitability, as the company remains focused on reinvesting excess returns back into the company, both on an organic and inorganic basis, to build out the platform and enhance future growth prospects. Twilio does not pay a dividend, nor repurchase stock, and for a young company in a relatively nascent industry, we find it appropriate that the company focuses capital allocation on reinvestments for growth.

Bulls Say:

  • The addition of SI partnerships and solution APIs should lead to increasing success in winning enterprise customers, which not only offer a greater lifetime value for a proportionally smaller acquisition cost, but also tend to be stickier customers. 
  • Twilio has stellar user retention metrics, with churn consistently below 5% and net dollar retention north of 130% in recent years. 
  • As Twilio focuses on developing more solution APIs and growth shifts from usage-based messaging to SaaS-like priced solutions, there should be a natural uptick in both gross margins and recurring revenue.

Company Profile:

Twilio is a cloud-based communication platform-as-a-service company offering communication application programming interfaces, or APIs, and prebuilt solution applications aimed at improving customer engagement. Through these APIs, Twilio’s platform allows software developers to integrate messaging, voice, and video functionality into new or existing business applications. The company leverages its Super Network, Twilio’s global network of carrier relationships, to facilitate high speed cost-optimized global messaging and voice-based communications.

(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.