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Technology Stocks

IRE offers a defensive earnings profile and trades on a solid dividend yield of ~4%

Investment Thesis:

  • Solid FY22 earnings guidance.
  • 30% of the $100m buyback remains to be complete, which should support IRE’s share price.
  • Growing quantum of superannuation/pension bodes well for IRE’s clients, which bodes well for demand for IRE’s products.
  • IRE’s products are firmly entrenched within Australia, UK and South African financial market players (i.e. IRESS terminals and XPLAN). For instance, in ANZ Wealth Management segment, increasing dynamic of self-licensing by practices, high client retention and increasing demand for integrated solutions, are all key revenue themes. Over 90% of revenue is recurring.
  • Strong continuing momentum in the core growth markets of ANZ Wealth Management, and South Africa and the UK.
  • New product roll-out providing growth opportunities.
  • Solid balance sheet and capable management team.

Key Risks:

  • Less subscription due to declining sell-side and buy-side demand as well as financial planners.
  • Competitive platforms/offering (new disruptive technology); improved features and innovation from competition.
  • Associated risks in relation to system, technology and software.
  • Regulatory and structural changes in the finance sector impacting clients and their needs.
  • Deterioration in equity and debt markets which may have a negative impact on terminal demand.
  • Further deterioration with its Canadian segment.

Key Highlights:

  • FY22 Guidance reaffirmed but expected to be at lower-end. “IRESS affirms the guidance range for full year 2022 of segment profit of $177m – $183m. 2022 segment profit is expected to increase by 7% – 10% versus the pcp. Results are now expected to be at the lower end of the range due to investment in fund registry as part of investment infrastructure, and delayed growth in the UK”. 
  • Segment profit for the year is expected to grow by around +7%.
  • Underlying NPAT (excludes $13-15m pre-tax of investment in IRESS’ single technology platform and significant one-off items in 2021) is expected to grow by around +25% for the year.
  • Underlying EPS is expected to be 40-44cps on a constant currency basis. 
  • Key assumptions: $13-15m (pre-tax) of investment in IRESS’ single technology platform expected in 2022 as disclosed in July 2021. Effective tax rate (ETR) is expected to be in the range of 23-26%. Guidance is presented on a constant currency basis using average 2021 FX rates. Guidance does not include the impact of any potential M&A activity in 2022.
  • 1H22 Results Highlights. Relative to the pcp: (1) underlying revenue of $306.4m, up +6%; reported revenue of $308.2m, +6%. (2) Underlying segment profit of $80.3m, up +6%; reported segment profit of $80.7m, up +7%. (3) Underlying NPAT of $31.8m, up +29%; reported NPAT of $30.6m, down -25%. (4) Underlying ROIC of +9.6%, up +140 basis points or reported ROIC 9.4%, down -110 basis points. (5) Underlying EPS of 17.1cps, up +32% or reported EPS of 16.4cps, down -23%. (6) The Board declared an interim dividend of 16 cents per share, 25% franked.
  • Performance Highlights by Segments. 1H22 Constant Currency Segment Profit up +6%, Underlying NPAT up +29%. (1) IRE saw strong performance in APAC trading & market data and financial advice with revenue of $135.6m, up +8%. APAC trading & market data total revenue growth of +9% to $71.0m, and financial advice growth of +7% to $64.6m, both outperformed the Company’s medium term target (total revenue growth of ~5% per annum). Management noted Xplan user numbers in financial advice are stable. (2) IRE also saw revenue growth of +9% $23.6m as management highlighted recurring revenue is on track to medium term targets, growing +17%, driven by ESSSuper and GuildSuper going live. IRE’s medium term target revenue growth is +18% per annum. (3) U.K saw total revenue of $64.3m, up +2%, driven by Private Wealth management, which outperformed the medium-term targets in 1H22 – recurring revenue up +25% to $10.3m. This was offset by Retail Wealth not meeting expectations, and partly being impacted by changes in specific clients’ business models. IRE’s medium term target total revenue growth is +7% per annum. (4) Mortgages performed well, seeing total revenue increase +18% to $16.1m in 1H22 vs 1H21.

Company Description:

IRESS Ltd (IRE) is an ASX-listed company that specialises in software for the finance industry, with a focus on financial markets, wealth management and superannuation. IRE operates in the Asia-Pacific, UK, South Africa and Canada.

(Source: Banyantree)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Dividend Stocks

Fresenius is pursuing the biosimilar market, which looks like a relatively large intermediate to long-term opportunity

Business Strategy & Outlook

Fresenius SE’s prowess in dialysis and injectable therapies has created opportunities to vertically integrate into several medical service and technology businesses by organic and inorganic means. Through its partial ownership of Fresenius Medical Care, the company seeks to benefit from that unique entity’s position as the world’s top dialysis service and product provider. In the U.S., this segment operates a convenient network of dialysis clinics at a similar scale as key peer DaVita, with the two firms cumulatively serving about three fourths of the U.S. dialysis outpatient population. Fresenius has established a number of clinics in more fragmented international markets, too, where it has a relatively. long runway for growth by opening or acquiring new clinics. Fresenius leads the dialysis product market primarily by providing haemodialysis equipment and consumables to clinics globally but also sells at-home haemodialysis and peritoneal dialysis tools.

Fresenius focuses on being a reliable provider of injectable therapies in its Kabi segment. This strategy requires Fresenius to efficiently manufacture safe and high-quality solutions, and because of this core competency, Fresenius has been a net beneficiary of competitor shortages in recent years. Fresenius also provides the pumps to automatically administer injectable therapies. By integrating into a hospital’s workflow and systems, Fresenius aims to benefit from recurring consumable sales during the pump’s long working life. Fresenius is also pursuing the biosimilar market, which looks like a relatively large intermediate to long-term opportunity. Through its Helios and Vamed segments, Fresenius provides services related to healthcare facility operation, management, and construction. In its Helios segment, it aims to provide top-quality hospital services in Germany, Spain, and Latin America, and it continues to look for acquisition opportunities especially in the latter two geographies. In Vamed, it helps caregivers operate more efficiently by providing construction project management, ongoing operations management, and post-acute care services.

Financial Strengths

Fresenius SE operates with an investment-grade credit profile. On a consolidated basis as of September 2021, Fresenius owed about EUR 27 billion in debt and lease obligations, including EUR 13 billion of debt and leases owed by Fresenius Medical Care that is not guaranteed by Fresenius SE. With about EUR 2 billion of cash as of September 2021, the company’s net leverage stood around 3.6 times. While easily manageable, management has expressed a desire to deleverage further after taking the hit to profits in the dialysis business in 2021. However, refinancing and acquisition-related activities may make Fresenius a debt issuer once it hits its deleveraging goal. Beyond acquisitions, Fresenius’ capital allocation strategy regularly includes dividends with a payout ratio around 20% of net income. And while the company typically does not make large share repurchases, those activities could become more attractive for Fresenius in future periods if acquisition opportunities do not present themselves, which would welcome at recent prices.

Bulls Say

  • Underlying demographic trends—such as aging, obesity, and diabetes—and international expansion opportunities should keep Fresenius’ dialysis services and related medical product growth in positive territory after the pandemic recedes.
  • Kabi’s biosimilar pipeline targets AbbVie’s Humira and Amgen’s Neulasta products, which could lead to a relatively large new revenue stream in this segment in the intermediate term.
  • The company maintains a manageable balance sheet, which should give it financial flexibility during potential future shocks.

Company Description

Fresenius SE is a healthcare holding company based in Germany with four segments. The company owns a large stake in dialysis service provider and equipment manufacturer Fresenius Medical Care, which accounts for about half of its consolidated revenue. The Kabi segment manufactures intravenous drugs, nutrition products, infusion and transfusion therapies, and related pumps. The Helios segment operates private hospitals in Germany, Spain, and Latin America. Vamed provides a variety of services such as healthcare facility construction and operation management, including post-acute care rehabilitation.

(Source: Morningstar)

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

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

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

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

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

Categories
Dividend Stocks

Dexus has sold stakes in office, industrial and healthcare assets into funds management vehicles that it manages

Business Strategy & Outlook

Dexus is a diversified Australian REIT that generates income from charging rent; managing property for clients; funds management, which typically includes property management and investment management services; and development and trading. Rent is the biggest revenue driver with the office and industrial divisions accounting for over 90% of funds from operations, or FFO. High-quality offices in Sydney dominate, with Dexus having interests in many trophy assets including Sydney’s Australia Square, 1 Farrer Place, and 1 Bligh Street. It also owns or manages a seasoned industrial portfolio, including the massive Dexus Industrial Estate in one of Australia’s fastest-growing industrial precincts, Truganina, Victoria. It also has a small retail portfolio, mostly retail sites attached to offices, and a small healthcare portfolio. Dexus has sold stakes in office, industrial and healthcare assets into funds management vehicles that it manages.

Funds management is the smallest but fastest-growing portion of revenue, and more developments being rotated into funds management vehicles, adding capital efficiency and management fees. It accounted for about 6% of revenue in fiscal 2019, and the funds management grows by about a third by the end of the discreted 10-year forecast period. The high-quality portfolio should see Dexus perform better than most, with about 90% of its office portfolio either premium or A-grade by Property Council of Australia guidelines. Dexus’ portfolio has held up relatively well in major downturns compared with rivals with lower-quality portfolios. It’s hard to imagine a worse scenario for an office property than that experienced in 2020-21. In those years, Dexus reduced rents somewhat on the small portion of leases that expired, but occupancy remained high.

Financial Strengths

Dexus is in solid financial health, with look-through gearing of 26.9%, below the group’s targeted range of 30%-40%. The group has substantial buffers to its banking covenants. However, gearing is likely to rise as Dexus commences development projects. Gearing ratios are also likely to rise as asset prices fall, given remarkably low capitalisation rates of 4%-5% being seen on CBD office transactions in fiscal 2022, and bond markets pricing in meaningfully higher interest rates. The group has a large pipeline of developments, and could make debt-funded acquisitions during the downturn, or a buyback, which could also push up gearing. This can be offset by divestments, including rotating some assets into its fund’s management vehicles, thereby taking them off the group balance sheet. On balance though, it is still expected gearing to rise from current levels. The Dexus’ reasonably conservative management team, and the health of other financial metrics look comfortable. Interest cover is 6.0 times on a look-through basis, compared with covenant of 2 times. Interest rate sensitivity is modest, with about two thirds of debt being hedged, and debt maturities are staggered. If inflation intensifies, further rate

rises could increase the cost of rolling over maturing debt facilities and put pressure on Dexus’ earnings and distributions in the near term. However, consistently it can be assumed a long-term cost of debt of 5.8%, significantly above current levels.

Bulls Say

  • Dexus owns a high-grade office property portfolio and a solid industrial portfolio, and it will likely benefit from an ongoing demand for quality property from the likes of pension funds, sovereign wealth funds and other offshore investors.
  • Population growth boosts the value of Dexus’ assets with high-quality sites achieving more rent bargaining power, and some low-quality sites potentially switching to higher-value uses.
  • Lower credit spreads and improving rental collections could offset potential interest-rate rises.

Company Description

Dexus is a major Australian property owner, developer, and manager. It owns a large, high-grade office portfolio and a smaller industrial portfolio in Australia. It also manages properties on behalf of third-party investors. Dexus was formed by the merger of Deutsche Office, Industrial and Diversified Trusts. Management is internal, as opposed to external, as it is for some peers.

(Source: Morningstar)

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

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

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

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

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

Categories
Dividend Stocks

Downer has established strong relationships with local and state governments that outsource operational and management activities

Business Strategy & Outlook

Downer is a major domestic infrastructure, rail, engineering, and maintenance business. The company is chiefly exposed to the domestic rail, water, road, and telecommunications sectors. The future of Downer is focused on urban services, with mining and high-risk construction businesses sold down. Downer does not have a moat despite position, scale, and strong customer relationships. Contracting is a difficult industry in which to establish a moat and Downer in the past decade underperformed from an operational and financial perspective as a result of miscalculating contract risk, poor project management, and unsatisfactory project execution. Downer’s mining operation contributed an approximate 15% share of group EBIT, down from 45% at the peak of the mining boom. It was an asset-heavy business undertaking only a small number of long-term large-scale open-cut mining service contracts. The business faced increasing competition and cyclical demand, being highly dependent on the expenditure plans of major mining and energy companies.

A large-scale network of facilities affords it a dominant position in service and maintenance of locomotives and wagons. The rail business is highly leveraged to both the mining sector and state government public transport expenditure. EBIT contribution from Downer’s engineering, construction, and maintenance, or EC&M, segment has fallen from 35% of group total to approximately 10%. The utilities segment comprises 15%-20% of Downer’s EBIT. Downer bought the majority 88% of Spotless Group in 2017 under an AUD 1.3 billion takeover and the balance in December 2020. Spotless fits with Downer’s diversification drive away from mining services.

Financial Strengths

Downer is now in good financial health. Net debt at June 2022 was AUD 623 million, down from AUD 1.5 billion levels just two years ago, and current 22% gearing and net debt/EBITDA of 1.1 excluding operating leases are more than conservative. Including operating leases, net debt/EBITDA is 1.6 and well below Downer’s 2.0-2.5 target range. The balance sheet is to be in net cash before decade’s end, flagged potential for incremental Urban Services acquisitions notwithstanding. Downer has set up a more capital-light business model for the future, with an emphasis on urban services. It’s

interesting to note that 65% of group fiscal 2020 capital expenditure went on mining and laundries. It’s clear why these segments were sold. Success on this front has enhanced the balance sheet.

Bulls Say

  • Downer is emerging from a period of turmoil and transformation. Restructurings, write-downs, major project losses, and contract disappointments of the past appear to be over.
  • Since July 2010, maintenance/infrastructure contract wins and introduction of a new project management framework have helped to re-establish Downer’s reputation.
  • Downer’s growing revenue streams from maintenance contracts in the social infrastructure, transport, telecommunications, and government sectors are helping to increasingly insulate the company from the downturn in mining work.

Company Description

Downer operates engineering, construction, and maintenance; transport; technology and communications; utilities; and rail units. But the future of Downer is focused on urban services, and mining and high-risk construction businesses have been sold. The engineering, construction, and maintenance business had exposure to mining and energy projects through consulting services. The mining division had provided contracted mining services. The rail division services and maintains passenger rolling stock, including locomotives and wagons.

(Source: Morningstar)

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

SQM’s Growing Lithium Capacity Should Benefit From Higher Prices as EV Adoption Rises

Business Strategy & Outlook

Through its access to high-quality mineral deposits, Sociedad Quimica y Minera de Chile is a large, low-cost producer of lithium, iodine, and nitrates used in specialty fertilizers. SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets. SQM’s low-cost lithium deposit in the Salar de Atacama boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert. As electric vehicle penetration increases, the high-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities. SQM is the top three lithium producers globally. The company is in the midst of expanding its lithium carbonate production capacity to at least 250,000 metric tons from 70,000 in 2019. SQM is also investing in lithium hydroxide production in Australia through a joint venture with Wesfarmers, Covalent Lithium, which will be a fully integrated spodumene-based lithium hydroxide producer. The first part of the project entered production in the mid-2020s, with a capacity expansion in the second half of the decade. Unit costs should sit on the lower half of the lithium hydroxide cost curve. SQM is a market leader in potassium nitrate, a specialty fertilizer used in high-value crops, including fruits and vegetables. Specialty potash demand should benefit from the shift in emerging-market diets to higher-value foods. While specialty fertilizer prices tend to move in line with commodity potash prices, they have been less affected by movements in commodity potash prices. SQM is also a small player in commodity potash. SQM is the world’s largest producer of iodine, used in X-ray contrast media, pharmaceuticals, and LCD films. Iodine demand has grown 3% annually over the past decade and should continue to grow at this pace as healthcare spending rises with aging populations. SQM had increased its market share to 35% by the end of 2017 through a volume-over-price strategy, which caused iodine prices to fall. After higher-cost supply reduced production and SQM achieved its market share goals, the company is now acting as a rational player and prices have increased since 2018.

Financial Strengths

SQM is in excellent financial health. As of June 30, 2022, cash and cash equivalents, including current financial assets, and total debt both stood at roughly $2.6 billion. SQM’s debt position has grown in recent years as the company is in the midst of quadrupling its Chilean lithium capacity, funding development of its Australian lithium joint venture project, and expanding its fertilizer and iodine production capacities. The company plans to spend over $2 billion in capital expenditures from 2021 to 2024 to support these growth initiatives. To help fund these investments, the company issued $1.1 billion in equity in early 2021. However, given the recent rise in lithium, fertilizer, and iodine prices, it is expected SQM will be able to pay for the remaining capital expenditures with cash generated from its operations. Ultimately, the company’s balance sheet remains healthy as profits grow from the increased volumes and higher lithium prices. SQM’s dividend varies each year. It is calculated as a percentage of net income that ranges between 50% and 100% depending on balance sheet metrics, including total current assets divided by total current financial liabilities and total liabilities minus current financial assets divided by total equity. While SQM’s dividend will fluctuate from year to year, the company will generate enough cash flow to meet all of its financial obligations, including dividends.

Bulls Say

  • SQM’s crown jewel is its Salar de Atacama operation in Chile, which is the lowest-cost lithium deposit globally. Its capacity expansions at this resource should create long-term value. 
  • The company’s specialty fertilizer blends of potassium, nitrates, and sodium garner a premium to commodity fertilizers due to their use in high-value crops, including fruits and vegetables. 
  • Lithium prices will remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and return on invested capital for SQM.

Company Description

Sociedad Quimica y Minera de Chile is a Chilean commodities producer with significant operations in lithium (primarily used in batteries for electric vehicles and energy storage systems), specialty and standard potassium fertilizers, iodine (primarily used in X-ray contrast media), and solar salts. The company extracts these materials through its high-quality caliche ore and salt brine deposits. SQM is also developing a hard rock lithium project in Australia.

(Source: Morningstar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Dividend Stocks

Amcor is a global plastics packaging behemoth, with global sales of USD 12.5 billion in fiscal 2021

Business Strategy & Outlook

Amcor is a global plastics packaging behemoth, with global sales of USD 12.5 billion in fiscal 2021. Amcor’s operations span over 40 countries globally and include significant emerging-market exposure equating to circa 20% of sales. Amcor’s capabilities span flexible and rigid plastic packaging, which sell into defensive food, beverage, healthcare, household, and personal-care end markets. Amcor has focused its portfolio on segments within flexible and rigid thermoplastics that feature attractive returns, largely underpinned by significant merger and acquisition, or M&A, activity. To this end, Amcor has completed 25 acquisitions since 2010 and is pushing forward with its largest transaction to date, making an all-scrip offer in August 2018 for leading U.S. flexibles player Bemis Co. 

Amcor divested its Australasian fiber, glass, and aluminum beverage can packaging businesses in conjunction with its North American fiber-packaging distribution business in December 2013, in order to focus solely on plastics. The focusing the portfolio on segments requiring more complex, greater value-add manufacturers that attract higher margins is entirely appropriate. In the longer term, the Amcor’s returns and moat benefit greatest from the scale in resin procurement that the enlarged group enjoys as a scale player in each of its geographies. The plastics industry remains a significantly fragmented industry in spite of the efforts of Amcor and other large regionally and globally active players to roll up the industry. Thus, resin procurement advantages for players with regional scale are both material and long-lasting, particularly in light of the mature nature of markets that the plastics industry sells into, where demand is derived from household consumption. Therefore, Amcor’s strategy positively and the key driver of returns on invested capital, or ROICs, have averaged 10.8% over fiscal 2016-20, comparing favorably with the weighted average cost of capital, or WACC, estimated at 7.9%. In the future, this advantage is to bolster Amcor’s positive ROIC-WACC spread, with ROICs expected to average 11% over fiscal 2021-25.

Financial Strengths

Amcor maintains substantial financial leverage but the defensive nature of packaging markets provides scope for relatively high gearing. Leverage–defined as net debt/EBITDA before IFRS-16 lease liabilities–stood at 2.7 times at fiscal 2022 year-end. With a free cash flow forecast of USD 1.2 billion in fiscal 2023, one commends Amcor’s freshly announced USD 400 million share buyback. Upon completion of the buyback, the leverage to remain at 2.7 times at fiscal 2023 year-end. In considering the use of leverage, Amcor aims to retain investment-grade credit ratings with credit ratings agencies S&P and Moody’s. Amcor speaks to a long-term leverage range of 2.25 – 2.75 times as sufficient to maintain its current credit ratings. However, net debt/EBITDA stood at 2.9 times at fiscal 2021 half year-end following the completion of the Bemis acquisition in fiscal 2020. Leverage is anticipated to recede as Bemis cost synergies are realized medium-term. Nonetheless, Amcor is comfortable running its balance temporarily above 2.75 times, noting that both S&P and Moody’s could downgrade Amcor one further notch and its debt would still retain a desired investment-grade designation. Given the highly defensive nature of Amcor’s business, this threshold for downgrade by the ratings agencies is likely in the range of 3.5 times to 4.0 times net debt/EBITDA. With leverage even under the bear case scenario–where Amcor’s volumes contract by circa 0.5% over the fiscal 2021 and fiscal 2022 period–leverage peaks at 2.8 times in fiscal 2025. Therefore, with Amcor not at risk of breaching its internal leverage targets, one can be confident that a breach of debt covenants in the current environment is highly unlikely.

Bulls Say

  • Amcor’s efforts to focus its portfolio toward more complex, greater value-added categories will lead to consistently higher margins. 
  • Exposure to emerging markets, with rapidly rising per capita incomes, helps offset Amcor’s mature demand from developed markets. 
  • Completion of the Bemis deal significantly augments Amcor’s existing flexibles portfolio, while adding additional scale in resin procurement.

Company Description

Amcor is a global plastics packaging behemoth, with global sales of USD 14.5 billion in fiscal 2022 following the acquisition of Bemis in 2019. Amcor’s operations span over 40 countries globally and include significant emerging-market exposure equating to circa 20% of sales. Amcor’s capabilities span flexible and rigid plastic packaging, which sell into defensive food, beverage, healthcare, household, and personal-care end markets.

(Source: Morningstar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Dividend Stocks

General Dynamics’ business jet segment primarily produces long-range wide-cabin business jets

Business Strategy & Outlook

About three-fourths of General Dynamics is a defense prime contractor and the other fourth a business jet manufacturer. Defense primes rely on defense spending for revenue, and companies with tangible growth profiles through a steady stream of contract wins, ideally to contracts that are fulfilled over decades. General Dynamic’s crown jewel of long-cycle contracts, the Columbia-class submarine, exemplifies this with planned procurement through 2042. Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow the defense primes to deliver a lot of cash to shareholders, which is positive because there’s no substantial growth in this industry. Defense primes are implicitly a play on the defense budget, which is ultimately a function of both, a nation’s wealth and a nation’s perception of danger. As the U.S. budget is looking increasingly bloated with pandemic relief, a near-term slowdown in defense spending to flat or even negative growth, but the contractors will be able to continue growing due to sizable backlogs and think that defense budget growth is likely to return. There is substantial political uncertainty in the budget, but it will be difficult to materially decrease the defense budget due to structural geopolitical changes that make great-power conflict more salient. One of the most common budgetary compromises of the previous decade has been more nondefense spending for more

defense spending. 

General Dynamics’ business jet segment primarily produces long-range wide-cabin business jets. This market is low volume, at roughly 200 global deliveries each year and many repeat customers. New, quality, product drives demand in this segment, so the company must continuously convince customers that it has built a better aircraft. Gulfstream dominates volume in this segment, with roughly 50% market share, which leads to superior margins due to progression along the learning curve. The introduction of the G700, G800, and G400 in 2022, 2023, and 2025, respectively will be major sales drivers.

Financial Strengths

General Dynamics historically has one of the best balance sheets among defense primes, and this is proper business strategy as the company is somewhat more cyclical than peers. General Dynamics issued some debt in 2020 due to pandemic-related uncertainties, and gross debt/EBITDA stood at 2.3 times at the end of 2021. General Dynamics had a sizable debt maturity in 2021, and has a much more manageable maturity schedule over the rest of the forecast period. Over the medium term, the company will bring gross debt/EBITDA to its normal historical levels below a single turn. It makes sense for General Dynamics to generally carry a lower debt burden than peers because they have a highly cyclical business jet segment in addition to the cyclical defense prime contracting business. General Dynamics produces a substantial amount of cash flow to service any debt burden and the company would be able to access the capital markets at minimal cost if necessary.

Bulls Say

  • General Dynamics’ Gulfstream franchise has top-tier volume share and margin in the large-cabin business jet market and has successfully transitioned to the G500 and G600, and G650. Business jets are in a post pandemic cyclical upswing.
  • General Dynamics’ marine segment has decades of revenue visibility, thanks to the long-cycle nature of shipbuilding.
  • Defense prime contractors operate in a cyclical business, which could offer some protection if the U.S. enters a recession.

Company Description

General Dynamics is a defense contractor and business jet manufacturer. The firm’s segments include aerospace, combat systems, marine, and technologies. The company’s aerospace segment creates Gulfstream business jets. Combat system produces land-based combat vehicles, such as the M1 Abrams tank. The marine subsegment creates nuclear-powered submarines, among other things. The technologies segment contains two main units, an IT business that primarily serves the government market and a mission systems business that focuses on products that provide command, control, computers, intelligence, surveillance, and reconnaissance capabilities to the military.

 (Source: Morningstar)

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

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

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

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

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

Categories
Shares Small Cap

Megaport has a stronger focus on growing revenue and EBITDA margins rather than chasing growth at any cost

Investment Thesis:

  • MP1 is a global Software Defined Network provider, focusing on cloud connectivity. As such, the Company is leveraged to the rapid growth of global cloud and data centres and is in a strong position to benefit from the rollout to new cloud and datacenter regions. Key macro tailwinds behind MP1’s sector: (1) adoption of cloud by new enterprises; (2) increased level of investment and expenditure by existing customers; and (3) more and more enterprises looking to use multiple cloud products/providers, which works well with MP1’s business model.  
  • MP1 has a scale advantage over competitors. MP1 has over 600 locations around the globe. MP1 has significant scale advantage over competitors and whilst replicating this scale is not necessarily the difficult task, it will take a number of years to do so during which time MP1 will continue to add locations and customers using the scale advantage.
  • Cash balance of $82.5m plus access to a $25m credit facility, management is confident in achieving positive FCF. 
  • Strong relationship with data centres (DC). MP1 has equipment installed in 400 data centres, so MP1 is a customer of data centres. MP1 also drives DCs interconnection revenue. Whilst several data centres like NEXTDC, Equinix provide SDN (Software Defined Network) services, it is unlikely data centres will look to change their relationship with (or restrict) MP1 given they are designed to be neutral providers to network operators. Further, given MP1’s existing customer base and connections with cloud service providers, it would be very difficult for data centres (without significant disruption to customers/cloud service providers) to change the rules for MP1.
  • MP1 has reported attractive trends in LTV to CAC ratio and customer churn (declining churn will also drive LTV to CAC ratio higher). 
  • Management has a stronger focus on growing revenue and EBITDA margins rather than chasing growth at any cost. 

Key Risks:

  • High level of execution risk (especially with respect to development). 
  • Revenue, cost and product synergies fail to eventuate from the InnovoEdge acquisition. 
  • Heavy reliance on third party partners (especially data centre providers and cloud service providers). 
  • Data centres like NEXTDC, Equinix provide SDN services and decide to restrict MP1 in providing their services. 
  • Disappointing growth (in terms of expanding data centre footprint, customers, ports, Megaport Cloud Router).

Key Highlights:

  • FY22 results summary. Group revenue was up +40% to $109.7m, driven by growth across regions with the North American market (NAM) delivering the largest growth at +49% YoY to $57.8m. American is MP1’s single biggest contributor to NAM and accounted for 51% of group revenues in June-22, with the majority of the contracts now denominated in U.S. dollars (USD). Monthly Recurring Revenue (MRR) of $10.7m at the end of June-22 was up +43% YoY suggests solid momentum going into FY23. Revenue performance by region: North America up +49% to $57.8m; Asia Pacific up +30% to $33.5m; and Europe up +33% to $18.4m.
  • key operating metrics performance YoY – data centres up +3% to 787; Cloud On Ramps up +19% to 278; Ports up +24% to 9,545; Megaport Cloud Router (MCR) up +46% to 731; Megaport Virtual Edge (MVE) up +248% to 73; and Total Services up +26% to 27,383. 
  • Gross profit (profit after direct network cost and partner commissions) was up +62% to $68.3m, with GP margin improving +800bps to 62%. Direct network costs were up +8% YoY with 26 new data centres added to the network and capacity upgrades on intra-regional routes. Partner commissions were up +36% YoY, in line with revenue growth and expected to grow as Company builds momentum in the indirect sales channel. Normalised operating earnings (EBITDA) loss of $10.2m was +23% above FY21 loss of $13.3m, with margin improving from -17% to -9%. Operating expenses of $78.5m were up +42% YoY driven by investments in Scale Up and Scale Out projects. Management noted 4Q22 EBITDA was positive with the business starting to realise the benefits from operating leverage. The Company ended the year with cash and equivalents position of $82.5m, down from $136.3m in pcp. However, the Company remains well funded and has access to a $25m credit facility to provide additional flexibility.
  • Tightening the belt and focusing on margins. Other key items of note from the results: There is a strong focus on growing revenue and EBITDA margins in FY23, which is a positive in the current environment where investors are questioning the ability of high growth companies to deliver margin and profit growth. The group exit EBITDA margin for 4Q22 was positive – Group 5%, APAC 64%, EMEA 45% and NAM 23%. Further, with the current cash and credit facility, management is confident in achieving positive FCF. 
  • Management provided good colour around customer churn, showing a significant drop in customer churn after 2 years. Overall, MP1 has a customer churn of approx. 7% p.a. and is expected to continue to decline. 
  •  MP1 reported LTV (Lifetime Value) to CAC (Customer Acquisition Cost) ratio of 6.3x for FY22, which is below FY21 levels as MP1 invested in additional sales capabilities (indirect sales channel). Nonetheless this is an attractive LTV-CAC ratio, and, with a declining customer churn, management expects this ratio to trend higher going forward.  

Company Description:

Megaport Ltd (MP1) is a software-based elastic connectivity provider – that is, it is a global Network as a Service (NaaS) provider. MP1 develops an elastic connectivity platform providing customers interconnectivity and flexibility between other networks and cloud providers connected to the platform. 

(Source: Banyantree)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Technology Stocks

Best Buy leverages its network of 20,000 Geek Squad agents, increases touchpoints with customers

20025825 - closeup image of businessman drawing 3d graphics

Business Strategy and Outlook 

Best Buy is taking adequate steps to shore up its competitive position in an intensely competitive consumer electronics space. As the industry emerges from the shadow of the coronavirus (and steps into the quagmire of elevated inflation and softening consumer spending), it has become clear that how people shop has permanently changed–with customers demanding seamless omnichannel access to favourite brands, quick fulfilment across channels, and tech solutions to more problems than ever before. As a result, Best Buy’s strategic positioning continues to resonate, with the firm leveraging its physical footprint for fulfilment and post-sale services, emphasizing its differentiated service offering, and experimenting with newer store formats, as the “one size fits all” retail model across trade areas appears antiquated. With more than one third of sales coming through digital channels in calendar 2021, the firm’s recent supply chain and e-commerce investments ($2.7 billion over the last five years, some 74% of total capital expenditures) look prescient. Next-day delivery now covers 99% of U.S. zip codes (up from 80% from pre-pandemic), allowing the firm to compete on more level ground against e-commerce competitors, like wide-moat Amazon–as buy-online-pick-up-in-store, or BOPIS) volumes, at 40% of Best Buy’s e-commerce sales, remain more challenging for online-only stores to replicate.

Further, there can be a positive view of the firm’s Totaltech program, with more than 4.5 million members receiving unlimited home tech support, VIP access to phone and chat teams, free delivery and standard installation, members-only pricing, and free extended warranties on Best Buy purchases. Through the program, Best Buy leverages its network of 20,000 Geek Squad agents, increases touchpoints with customers, and positions itself better to earn the first shot at servicing customer category needs. Finally, Best Buy Health remains intriguing, with lower price elasticity and auspicious tailwinds from an insurer pay model. However, competition in the space remains rife, as a number of larger firms with healthcare aspirations (Google, Amazon, Apple) have invested in the space.

Financial Strength

Best Buy’s financial strength is sound, with the firm maintaining a modest net debt position and an investment-grade credit rating. With leverage well under 1 turn (0.3 debt/EBITDA at fiscal 2022 year-end), strong EBIT interest coverage (122 times), and no meaningful maturities until 2028, A very little financial risk for the firm may be in the near to medium term. Access to a $1.25 billion credit facility adds a further degree of insulation. Consistent with historical patterns, Best Buy is to prioritize growth capital expenditures, strategic acquisitions, dividends, and share repurchases with its free cash flow to sales (averaging 3.9% of sales annually over the next five years). Best Buy pays an attractive dividend, with the forecast calling for meaningful expansion through 2032, calling for a low-40% payout ratio. Share repurchases are to average a low-single-digit percentage of shares outstanding through 2032, with the model calling for total shareholder returns of $9. billion through fiscal 2027

Bulls Say’s

  • With digital sales volumes projected to equilibrate at roughly double pre-COVID-19 levels, Best Buy should better compete for online volumes that it historically ceded to online competitors. 
  • Improving route densities should strengthen the margin profile of small parcel e-commerce sales, with 35% of store “hubs” now accounting for 70% of shipfrom-store volume. 
  • The Best Buy Totaltech program should increase touchpoints with the firm’s best customers, increasing spending and frequency relative to pre-program behaviour.

Company Profile 

With $51.8 billion in fiscal 2022 sales, Best Buy is the largest pure-play consumer electronics retailer in the U.S., with roughly 10.6% share of the aggregate market and north of 40% share of offline sales, CTA industry, and Euromonitor data. The firm generates the bulk of its sales in-store, with mobile phones and tablets, computers, and appliances representing its three largest categories. Recent investments in e-commerce fulfilment, accelerated by the COVID-19 pandemic, have seen the U.S. e-commerce channel roughly double from pre pandemic levels, with management estimating that it will represent a mid-30% proportion of sales moving forward.

(Source: MorningStar)

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

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

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

Categories
Technology Stocks

NFLX reported positive 2Q22 results, which despite missing top-line consensus forecast

Investment Thesis

  • Trades on multiples which are susceptible to de-rating should growth rates miss expectations.
  • An increase and escalation of intense competition by rivals such as Walt Disney (Disney+) and Apple Inc (Apple TV+). 
  • NFLX is transitioning from solely content distribution to content creation which presents execution risk.
  • Significant existing user base, which is continuing to grow strongly, particularly in the international market.  
  • Competitive positioning globally, as a market leader not only in the industry but starting to carve a leading position against cable television.  
  • International expansion opportunities across emerging markets as well as solidified position in established markets (US). 
  • Exclusive contracts with best producers including Sony Entertainment, Warner Bros and Universal Pictures.   
  • Growing demand for Netflix exclusives.
  • Flexibility to pick up content driven away by TV to customize viewing according to user tastes and preferences. 

Key Risks

  • High valuation and trading multiples which are susceptible to de-rating should growth rates miss expectations.
  • Escalation of intense competition and streaming wars, especially with Walt Disney (DIS) who own a strong content portfolio covering Disney, Pixar, Marvel, Star Wars, and National Geographic brands and sports streaming service ESPN+.  DIS also holds a majority stake in Hulu, which is an online streaming service provider.
  • Execution risks around content creation versus content distribution.
  • Increasing competition based on price or exclusive content contracts.
  • Investment into original content creation fails to live up to the success of exclusive contract deals of existing content. 
  • Bandwidth issues in emerging economies posing difficulties in penetrating these markets.
  • The long-term and fixed cost nature of content commitments hinder NFLX’s operating flexibility.

Key Highlights 

  • Sheds subscribers for second quarter in a row. After more than a decade of uninterrupted growth, NFLX has been suffering a drop in subscriber numbers in FY22, ending 2Q22 with 220.67m, down -97,000 vs prior quarter (vs management’s forecast of 2m decline), as the Company continues to suffer from the pull forward in demand from the pandemic. The management’s strategy to roll out a cheaper, ad-supported membership scheduled to start in FY23 would not only help reduce churn rate (according to Antenna research NFLX’s churn rates have climbed to 3.3% from 2.4% historically) and help lure new customers especially as tough macro-economic conditions are prompting consumer budget cuts, but also help in profit growth by attracting premium CPMs from brand advertisers by leveraging combination of very engaged audience and high quality content, with a crackdown on password-sharing (NFLX estimates that more than 100m households are currently sharing another one’s account) further boosting subscriber numbers.
  • Cashflow profile improving. Cashflow profile continued to improve with net cash from operations in 2Q of $103m (vs outflow of $64m in pcp) and FCF of $13m (vs outflow of $175m in pcp) as transformation of the content model from licensed second run content to mostly Netflix originals (60% of net content assets on balance sheet are now Netflix-produced) continues to bear fruits with the Company now through the most cash-intensive part of the transition, resulting in cash content spend-to-content amortization expense ratio declining from FY19’s peak of 1.6x (along with peak negative FCF of $3.3bn) to 1.4x in FY21 and expected to be 1.2-1.3x in FY22 (resulting in FCF of ~$1bn) with further decline going forward leading to substantial growth in y/y FCF in FY23.

Company Description

Netflix Inc is an American company operating a global entertainment streaming service, which provides subscription video on demand to movies and television episodes over the Internet. The Company operates in three different segments, Domestic Streaming (US market comprising almost half of the business), International Streaming and Domestic DVD (1% of revenue). These businesses generate membership fees as well as revenues from DVD by mail. Netflix provides its services in over 190 countries with over 150 million members, distributing user focused content that fits consumer tastes and preferences.

(Source: Banyantree)

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