Tag: Top Stocks

Investment Thesis:

• It is anticipated an improvement in radio advertising markets over the medium term and expect solid demand for radio as a medium for advertising agencies. 
• Further cost outs, specifically significantly lower corporate overheads costs. 
• Potential corporate activity given changes to media ownership rules. 
• Upside to the valuation of Soprano (25% interest) 
• Ongoing capital management initiatives.  
• Solid balance sheet.

Key Risks:

• Decline in advertising dollars (radio and outdoor), especially if the retail sector in Australia comes under pressure.
• Radio experiences structural disruption.
• Increased competition from major player(s) on tenders. 
• Execution risk with international expansion.
• Hong Kong could become a drag on group performance (Coronavirus or protests escalate). 
• New and extensive Covid-19 related lockdowns are reintroduced nationwide.  

Key highlights:

HT&E (HT1) delivered a strong FY21 result on the back of a solid performance by radio in the back half of CY21 despite lockdowns. Group revenue of $225m was up +16% YoY and EBITDA of $59.8m up +21% on the back of solid top line growth and good cost management. The Company also closed the acquisition of 46 radio stations focused on regional markets from Grant Broadcasters, with management calling out $6-8m of revenue opportunities in CY22. The resolution to the ATO matter over the year was also a positive.

• Driven by a resilient radio market, group revenue of $225m was up +15% YoY (or up +16% on a like-for-like basis). The Company saw improved ad spend in the second half of CY21 despite extended government-enforced lockdowns.  On the back of strong top line growth and good cost management, HT1 delivered EBITDA of $59.8m up +21% and EBIT of $45.9m up +41%. Group NPAT of $28.8m was up +87% YoY. 
• The Company declared a final dividend of 3.9cps, taking the full year dividend to 7.4cps fully franked. Management is committed to a dividend payout ratio of 60-80%, subject to market conditions.
• Balance sheet is in a strong position with net cash position of $189.1m. Debt of $67.2m and cash reserves were utilized to fund the acquisition of 46 radio stations from Grant Broadcasters in early January 2022. Subject to market conditions, management expects leverage to be below 1.0x by the end of CY22.
• Total segment revenue was up +12% to $195.6m, with Radio revenues were up +13% (maintaining its momentum) and Digital audio revenues up +48% (excluding disposed businesses) with podcasting the main driver. Segment costs were up +14% on a like basis driven by higher cost of sales on improved revenues, while people and operating expense came in at the low end of the guidance provided at the half year result. 

Company Description: 

HT&E Limited (HT1) is a media and entertainment company with operations in Australia, New Zealand and Hong Kong. The Company operates the following key segments: (1) Australian Radio Network (ARN) – metropolitan radio networks including KIIS Network, The Edge96.One and Mix106.3 Canberra; (2) Hong Kong Outdoor (Cody) – Billboard, transit and other outdoor advertising in Hong Kong, with over 300 outdoor advertising panels and in-bus multimedia advertising across 1,200 buses; and (3) Digital Investments – digital assets including iHeartRadio, Emotive and Conversant Media.    

(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:

• High quality company with a history of earnings and dividend growth.
• Massive opportunity to convert white-wood users as well as the palletisation of emerging markets.
• On-going on-market share buyback should support its share price.
• Strong management team with proven ability to maintain cost margins amidst cost pressures through strategic business efficiencies.
• Volume growth in the US Pallet business and improving outlook for margin.
• BXB’s scale, existing customer base and balance sheet will ensure it remains a market leader in the mid-to-long term.
• M&A activity

Key Risks:

• Competitive pressures and cost inflation leading to margin erosion, particularly in the North American market. 
• Operations are very capital intensive. 
• Any further loss of large contracts significantly reducing revenue and earnings.
• Weak economic conditions will lead to less consumption of FMCG, and hence less use of pallets.
• Volatile whitewood prices.
• Exposed to a wide range of currency and political risks. 
• Reintroduction of widespread lockdowns in key regions.

Key Highlights 1H22 Results:

• Group revenue of US$2,766.4m, +8% YoY in constant currency terms with contribution from all three reporting segments. Key components of top line growth: price realisation across all regions to recover inflation and cost-to-serve pressures contributed +8%; new contract wins contributed +2%; and like-for-like volume growth was down -2% due to the strong Covid-19 related demand in the previous corresponding period and pallet availability constraints during this year.
• Underlying profit of US$481.2m was up +4%. Key components of group profit drivers over the half: impact of US$85m due to inflation across the group; US$93m impact from fuel and transport inflation across the group; US$35m impact from higher losses / lower returns (primarily in the U.S.); and US$24m costs associated with the transformation program.
• Underlying EPS of US21.3cps was driven by higher operating earnings and benefit from the share buy-back programme. The Company declared an interim dividend of US10.75cps (or AUD15.06cps), representing a payout ratio of 50% (within target range of 45-60%).
• Free cash flows after dividends over the half deteriorated by US$311.7m to an outflow of US$147.9m due to: (i) US$115m impact from the reversal of FY21 timing benefits comprising the US$80m of pallet purchases deferred from the prior year and US$35m relating to the timing of FY21 tax payments; (ii) capital expenditure jumped significantly due to lumber inflation of $270m and US$80m of additional pallet purchases (which were deferred from the prior year.
• BXB’s financial ratios remain well within <2.0x financial policy, with net debt / EBITDA at 1.37x vs 1.18x in pcp.

Company Description: 

Brambles Limited is a supply-chain logistics company operating in more than 60 countries, primarily through the CHEP brands. Headquartered in Sydney, its largest operations are in North America and Western Europe. The company’s main segments are: pallets, reusable produce crate (RPCs) and containers. It services customers in the fast-moving consumer goods industries and also operates specialist container logistics businesses serving the automotive, aerospace, and oil and gas sectors. It employs more than 14,500 people and owns more than 550 million pallets, crates and containers through a network of more than 850 service centres.

(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

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.

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.

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.

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.