Tag: Top Stocks

Investment Thesis

• Undemanding valuation relative to the market. 
• Higher (and stabilizing) commodity prices should translate into improving volumes. 
• Better than expected performance on the cost out. 
• Attractive dividend yield 
• Mostly defensive earnings backed by contracts, providing stability in shareholder returns.
• The Company does have long-term plans to reduce exposure to coal. 
• Divestment of ECR at an attractive valuation. 

Key Risks

• Significant decline in commodity prices leading to mine closures or reduced volumes from customers. Any potential declines in iron ore prices.
• Structural decline in some commodities (e.g., coal). 
• High costs impacting margins.
• Contract repricing resulting in longer term revenue loss.
• Pricing pressure to increase.
• Potential cuts to dividends given the elevated payout ratio.
• Weather related impacts. 
• Divestment of ECR business is not completed at a valuation in line with market expectations. 

Key Highlights

• Revenue of $3,075m was +2% higher. 
• Underlying EBITDA of $1,468m, -1% lower. FY22 earnings were driven by: (i) Network business achieved EBITDA of $801m, a -6% decline, due to lower volumes, lower historical or catch-up revenue from the Wiggins Island Rail Project (WIRP) and lower Goonyella to Abbot Point Expansion (GAPE) fees. (ii) Bulk business EBITDA declined -7% to $130m, on lower volumes caused by major flooding events, Covid-19 related disruptions and customer-specific reductions in production. (iii) Coal EBITDA was up +1% to $541m due to the benefits of cost management, higher CPI favorably impacting contract rates and higher revenue yield, despite above rail coal tonnes being down by 4%.
• Underlying EBIT of $875m, down -3%. 
• Underlying NPAT was $525m, down -2%, while Statutory NPAT declined -15% to $513m, primarily due to one-off benefits recorded in FY2021 (tax benefit from the sale of interest in Aquila) and transaction costs for the acquisition of One Rail Australia (ORA) incurred in FY2022.
• Return On Invested Capital (ROIC) of 10.3% down by 0.4ppt. 
• Free cash flow increased +13% to $664m.
• The Board declared a fully franked final dividend of 10.9cps, which represents 75% payout ratio of underlying NPAT and brings total dividend for FY22 to 21.4cps, down -26%.

Company Description

Aurizon Holdings Ltd (AZJ) operates an integrated heavy haul freight railway in Australia. It transports various commodities, such as mining, agricultural, industrial and retail products; and retail goods and groceries across small and big towns and cities, as well as coal and iron ore. The Company also operates and manages the Central Queensland Coal Network that consists of approximately 2,670 kilometers of track network; and provides various specialist services in rail design, engineering, construction, management, and maintenance, as well as offers supply chain solutions. In addition, it transports bulk freight for customers in the resources, manufacturing, and primary industries sectors. The Company was formerly known as QR National Limited and changed its name to Aurizon Holdings Limited in December 2012. AZJ is headquartered in Brisbane, Australia.

(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.

Business Strategy & Outlook:    

HSBC’s strengths are its positions in the U.K. and Hong Kong banking systems. As China, Hong Kong, and Singapore are important pools of wealth and growing trade corridors, the bank’s pivot toward Asia, which makes up about 75% of pretax profit, makes strategic sense. The focus is on deepening relationships with customers across its existing geographies, and leverage the bank’s international network in bringing in new clients. According to the bank, its banking network addresses 90% of global trade and generates about 40% of the bank’s revenue. The broad geographic nature of its business model results in reduced pretax profit volatility versus peers, as evident during the global financial crisis, but comes with higher capital requirements.

Over the past few years, the bank restructured and exited unprofitable markets and low-returning regions. However, the restructuring was not enough and the bank struggled in global banking and markets, Europe, and the U.S. To address these issues, the bank announced another restructuring plan at the end of 2019. The restructuring is proceeding as planned with USD 104 billion of the risk-weighted assets redeployed or reduced at the end of 2021. A target of USD 120 billion by 2022 is achievable. Close to USD 3.3 billion in cost has been taken out of the business and the completion of the USD 5.5 billion program is expected by 2022. Cost savings is expected to be generated from digitalization, resulting in automation, a decline in headcount from operations and technology, and reduced office footprint. The restructuring plan allows HSBC to focus on its strengths in Asia and the U.K., the Asia region is growing in terms of importance for global trade, increased urbanization, and a growing middle class. The bank’s strengths in Hong Kong position it well to take advantage of growth in the Pearl River Delta, given it is the leading international bank in China. The latter is achieved through the bank’s long operational history and investments in China. As a result, HSBC is well positioned to capture economic growth in asset management, yuan internationalization, and consumer and corporate lending.

Financial Strengths:  

Much attention has been paid to HSBC’s dividend and its ability to return capital. HSBC to be in good financial health. Risk-weighted assets have declined as the bank improved its capital efficiency and redeployment of USD 100 billion in RWA, by 2022, is expected to lift profitability. RWA intensity has already declined to below 30s at the end of 2020 from above 40% in 2014. The common equity Tier 1 ratio was 13.6% at the end of second-quarter 2022. Management expects to maintain the common equity Tier 1 ratio at a range of 14% to 14.5% in the long term. With the coronavirus situation improving, the U.K. regulator is allowing U.K. banks to reinstate its dividends in 2021. HSBC provided an updated dividend policy of 40% to 55% of reported earnings per share applies from 2022, compared with a fixed dividend of USD 0.51 per share previously. A share buyback of USD 2 billion was announced in 2021 and completed in early 2022, and a further USD 1 billion buyback was announced at the end of 2021 to begin in April 2022. The common equity Tier 1 ratio of 13.6% at end of the second quarter is below the bank’s target of 14% to 14.5%, and this may dip below 14% in the third quarter due to the divestment of its French retail business and acquisitions. Profitability to drive a higher common equity Tier 1 ratio from 2023, and expected further capital management initiative in 2023. The bank’s liquidity position is also strong. Customer deposits make up around 60% of group funding, equity at 10%, and the balance from the wholesale debt and trading liabilities. The bank’s liquidity coverage ratio and net stable fund ratio both exceed regulatory requirements.

Bulls Say:

• HSBC’s exposure to the fastest-growing economies ensures robust demand for its products and services, from deposits and wealth management to international trade finance.
• The benefits of geographic diversification were highlighted during the financial crisis. Although HSBC took large losses in its North American segment, its other operations picked up the slack, and the bank escaped without reporting a loss.
• HSBC has been operating in many banking systems for decades, building up a deep well of local knowledge and relationship that is hard to duplicate.

Company Description:

Established in 1865 in Hong Kong, London-based HSBC is one of the largest banks in the world with assets of USD 3 trillion and 40 million customers worldwide. It operates across 64 countries with around 220,000 full time staff. Key regions include Asia, Europe, the Middle East and North Africa, and North America. United Kingdom and Hong Kong are the two largest markets for the bank. The bank offers retail, commercial and institutional banking, global banking and markets, wealth management, and private banking.

(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.

Business Strategy & Outlook

Williams Companies has shifted its strategy in recent years to focus on organic growth investments that improve the returns and competitive position of its legacy assets. This is a positive for investors, creating a more stable financial profile and more high-return growth opportunities than most of its midstream peers. Clean energy investments could become a material growth area in the next few years, with the recent Orsted partnership a particularly attractive growth engine for its Northwest portfolio. With nearly half of its earnings and cash flow coming from rate-regulated gas pipelines, Williams increasingly looks more like a utility than an energy company. Williams delivered steady performance through turbulent energy markets the last two years, relying on its largely fee-based, long-term contracted revenue and strategically well-positioned assets. The recent acquisition of Sequent looks well timed, as marketing profits have well exceeded expectations in 2022. Most of Williams’ growth will continue to be directed toward its Transco gas pipeline, which runs from the Gulf Coast to the Northeast. Transco links low-cost gas supply in the Gulf Coast and Marcellus shale to high demand for retail use, LNG exports, gas power generation, and increasing industrial gas demand. Specifically, Williams is developing seven bcf/d of projects related to LNG and five bcf/d for power generation and industrial gas opportunities. The Transco capacity will reach 21 bcf/d by 2023 from 10 bcf/d in 2014 and continue to grow as natural gas demand in the eastern U.S. grows. With more than 100 bcf/d in interconnects and regulatory hurdles for competing projects, Transco faces no major competitive threats. Williams’ other businesses are demonstrating their favorable competitive positions with steady results through volatile energy markets. The Northeast gathering and processing business has a captive customer base in low-cost producing regions. The Northwest pipeline benefits from steady demand from utilities and supply from producers in the Western U.S. Williams is growing and improving the competitive position of its other assets through upstream partnerships.

Financial Strengths

Williams has strengthened its balance sheet and dividend coverage in recent years. Leverage has fallen to 3.9 times at the end of 2021 from over 5 times in 2016, and to continued declines over the next few years. Its improved credit profile and long-term, fixed-fee contract structures gives Williams financial flexibility to pursue growth investment opportunities, grow the dividend, keep the balance sheet strong, and execute its $1.5 billion share repurchase plan initiated in September 2021. The Trace Midstream deal for $933 million has consumed Williams’ excess cash and then some in 2022, but buybacks could exceed $400 million annually in 2023 and 2024. Williams can maintain steady dividend growth even through short-term energy market volatility. Williams has raised its dividend to $1.64 in 2021 from $1.20 in 2017 while strengthening its balance sheet. One can expect 3%-4% dividend increases going forward. The 2018 consolidation of Williams Partners and elimination of incentive distribution rights resulted in a shadow dividend cut of about 17% for former Williams Partners unitholders. The flip side was an improved credit profile, higher dividend coverage, and the ability to invest in growth without issuing equity. The long-running legal dispute between Williams and Energy Transfer over Energy Transfer’s alleged breach of its merger agreement appears to be close to an end. After repeated arguments since 2016, Williams won a $410 million settlement plus fees and interest in December 2021. However, the settlement can still be appealed to the Delaware Supreme Court.

Bulls Say

• A large, well-positioned network allows Williams to invest in high-return growth projects with minimal regulatory hurdles. 
• After several years of structural and financial moves, Williams is positioned to maintain steady dividend growth for the foreseeable future. 
• Williams is leveraged to U.S. LNG exports via agreements with LNG terminals as a key supplier of gas.

Company Description

Williams is a midstream energy company that owns and operates the large Transco and Northwest pipeline systems and associated natural gas gathering, processing, and storage assets. In August 2018, the firm acquired the remaining 26% ownership of its limited partner, Williams Partners.

(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.

Business Strategy & Outlook

Rogers has alleviated the concern one has long had that its wireless network is falling behind rivals Telus and BCE and that BCE’s fiber-to-the-home build-out would dent Rogers’ cable dominance. It has invested to improve its wireless network, and it has skirted Shaw’s fate of cable customer losses in the face of its competitor’s network improvement, mitigating market share losses. Its proposed acquisition of Shaw will be value neutral, but the purchase price and integration uncertainty bring greater risk. Rogers is investing heavily in its wireless network. It was the biggest spender in 2019’s 600-megahertz spectrum auction and 2021’s 3500-megahertz spectrum auction. The firm is also rolling out its 5G network, which one doesn’t expect to be consequential in the near term but should ensure that Rogers doesn’t lag competitors. 

While Rogers’ network has clearly been behind Telus and BCE in network speed ratings, one doesn’t think it has a practical effect on service customers receive. Nonetheless, Rogers to close the gap as it rolls out its newly acquired spectrum and transitions to a 5G network. The enhanced network in conjunction with the industry consolidation will result in churn declining, pricing power increasing, and margins expanding. Rogers will face tougher cable competition, but with BCE’s network revamp more than 50% complete, Rogers has been holding its own. Rogers has averaged better than 4% annual broadband subscriber growth since 2016. TV and phone subscribers continue to decline, which will continue, but phone service will make up only 6% of cable revenue in 2019, and the smaller TV subscriber base will be somewhat offset by the premium Ignite TV offering. The Rogers’ media unit, or at least parts of it, has more value in a sale than it does as an operating business. According to Forbes magazine estimates, the Blue Jays are worth USD 1.8 billion, but the team generates no operating profit. The move away from linear TV viewership and the shift to digital media content has impaired print publication and television and radio station holdings.

Financial Strengths

Rogers’ leverage has been significantly higher than usual in recent years, as the firm has been upgrading its networks, participating in spectrum auctions, and deploying capital to enhance its television offerings. The leverage will remain somewhat elevated in coming years as the firm’s elevated network spending continues. However, one doesn’t foresee any difficulty in Rogers’ ability to meet its obligations as the economy turns down. Though Rogers targets a net debt to EBITDA ratio under 2.5, it was 3.2 as of June 30, 2022 (excluding debt the firm has taken on and reserved for the Shaw purchase), and to remain above 3.0 through 2023, as spectrum auctions and the Shaw merger will keep debt levels heightened. However, interest coverage remains strong, with an adjusted EBITDA to interest expense ratio of nearly 7.0 at the end of 2021. The current dividend is well covered, with free cash flow still covering the dividend by nearly two times. One doesn’t think the dividend is ironclad in a prolonged period of weakness, but the firm did not cut it amid the COVID-19 outbreak, and one doesn’t anticipate it will even need to consider it unless a major recession coincides with the near-term merger and spectrum obligations. However, one doesn’t expect regular dividend increases while leverage is elevated and spectrum outlays continue.

Bulls Say

• With the Canadian wireless market less penetration than the U.S. and Europe and the country receptive to immigrants and foreign workers, wireless subscriber growth should remain high. As the industry leader, Rogers is well positioned. 
• Rogers’ media unit is worth far more than the market is giving it credit for. If that continues, Rogers can sell some assets to create significant value. 
• A gradual return of roaming traffic gives a long runway for heightened wireless average revenue per customer growth.

Company Description

Rogers is the largest wireless service provider in Canada, with its more than 10 million subscribers equating to one third of the total Canadian market. Rogers’ wireless business accounted for 60% of the company’s total sales in 2021 and has increasingly provided a bigger portion of total company sales over the last several years. Rogers’ cable segment, which provides about one fourth of total sales, offers home Internet, television, and landline phone service to consumers and businesses. Remaining sales come from Rogers’ media unit, which owns and operates various television and radio stations and the Toronto Blue Jays. Rogers’ significant exposure to sports also includes ownership stakes in the Toronto Maple Leafs, Raptors, FC, and Argonauts.

(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.

Business Strategy and Outlook 

U.S. Bancorp is one of the strongest and best-run regional banks. Few domestic competitors can match its operating efficiency, and for the past 15 years the bank has consistently posted returns on equity well above peers and its own cost of equity. U.S. Bancorp’s exposure to moaty nonbank businesses and its consistently excellent core banking operations make us like the company’s positioning for the future. It would be that the bank was already on top of its game years ago, making it difficult for the firm to further optimize efficiency and returns, while peers seem to be gradually “catching up” over time. U.S. Bancorp has an attractive mix of fee-generating businesses, including payments, corporate trust, investment management, and mortgage banking. The payments and trust businesses tend to be highly efficient and scalable due to relatively fixed cost structures. Barriers to entry tend to be high as the initial investment and scale necessary to compete are prohibitive, although competition within payments has heated up in the last several years as software and technology offerings are increasingly important.

USB has generally made the necessary investments in technology, leading to more integrated back-end systems, a competitive payments platform, and a leading presence in the push toward omnichannel banking. The continued secular trend of the increasing digitization of payments should provide further growth opportunities, and the importance of scale and technology should favour the largest banks, including U.S. Bancorp, over time. Payments volumes are coming back for the bank as its merchant acquiring and commercial payments businesses are set to turn a corner in 2022 as economic activity improves. The upcoming acquisition of Union Bank favourably and think the cost savings alone should add some value for shareholders. U.S. Bancorp has one of the best deposit market share concentrations under the coverage, which strengthens the efficiency and profitability of its traditional banking segments. Managers in the bank are also required to have 5% cost-cutting plans ready at any time if needed.

Financial Strength

U.S. Bancorp is in good financial health. The bank weathered the 2016 energy downturn well, and energy loans currently make up only 1% of the loan book. The bank also performed admirably through the pandemic driven downturn. Most measures of credit strain remain quite manageable, and the bank’s history of prudent lending–and the fact that the makeup of its loan book has not changed that much over time–gives us comfort with the risks here. There are no significant concerns about capital. U.S. Bancorp had a common equity Tier 1 ratio of 9.7% as of June 2022. This is well within a reasonable range. The capital-allocation plan remains standard for the bank, with roughly 40% of earnings devoted to dividends, internal investments prioritized, and then the remainder devoted to buybacks.

Bulls Say’s

• Strong fee revenue in moaty businesses, such as payments, helps insulate U.S. Bancorp from a flatter yield curve environment and drive higher returns on equity. 
• The bank’s upcoming acquisition of MUFG Union Bank should provide additional revenue growth, expense synergies, and value for shareholders. 
• As payments-related balances and fees come back in 2022, it should provide another earnings growth lever for U.S. Bancorp.

Company Profile 

As a diversified financial-services provider, U.S. Bancorp is one of the nation’s largest regional banks, with branches in well over 20 states, primarily in the Western and Midwestern United States. The bank offers many services, including retail banking, commercial banking, trust and wealth services, credit cards, mortgages, and other payments capabilities.

 (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.

Business Strategy & Outlook:    

Macquarie Group is a global asset manager which has spent decades branching out from its Australian investment banking roots. Asset management provides more recurring revenue streams compared with transactional based investment banking, but still carries volatility as base management fees are tied to underlying asset values–primarily fixed income, equities, and infrastructure assets. Macquarie Asset Management is a top 50 global asset manager with over AUD 750 billion of assets under management. Specialist capabilities in infrastructure and property management set Macquarie apart from most peers and has been a key source of growth.  With established capabilities and investment records, the large asset managers in the space continue to garner the bulk of inflows into the category. The American Society of Civil Engineers estimates around USD 5 trillion is needed on infrastructure by 2025 covering ageing transportation, electricity, schools, and airports. The European Investment Bank estimates the transition to renewable energy will require annual spend on energy infrastructure to almost double to EUR 688 billion. More broadly, Oxford economics estimates USD 75 trillion of infrastructure investment is required globally by 2040. 

Macquarie retains a targeted approach across its investment banking business, not actively seeking to take global players head on. In the Americas and EMEA, Macquarie holds less than 2% share. Macquarie continues to leverage its global expertise and reputation in infrastructure and energy to focus on deals in these markets, with success in the smaller end of the market sometimes underserviced by larger investment banks. It is also more active in advising the private equity space. The banking and financial services division includes a retail bank (around 4.5% of Australian home loans) and an asset leasing business heavily weighted to auto vehicle financing. Macquarie’s strategy to invest in technology to improve both the customer experience and the banks’ credit approval processes will continue to deliver above-market loan growth.

Financial Strengths:  

The group balance sheet is strong, with Macquarie Bank having an APRA Basel III common equity Tier 1 capital ratio of 12.3% at June 2022. Based on internationally harmonized Basel III metrics, the common equity Tier 1 capital ratio was 15.6%. At a group level, Macquarie has AUD 10.1 billion in surplus capital above regulatory requirements. The dividend payout ratio target is 50%-70% of earnings. A high percentage of offshore earnings means dividend franking is currently 40%. Funding sources are well diversified, with minimal reliance on short-term wholesale funding markets. Customer deposits represent around 40% of total funding with bonds (20%) and equity and hybrids (15%) other large components of the well diversified funding mix. While Macquarie’s earnings are exposed to global markets, an increasing base of recurring income provides improved stability and the financial position is sound.

Bulls Say: 

• Macquarie’s position as the largest infrastructure asset manager globally leaves the firm well placed to benefit from underlying demand for assets and investors searching for maintainable income streams.
• The expansion into funds management has produced more maintainable, less capital intensive, annuity- style income, which will prevent a GFC-like shock to earnings and return on equity.
• A focus on niche segments of investment banking allows Macquarie to continue to increase earnings globally.

Company Description: 

Macquarie Group began trading in 1969 as Hill Samuel Australia, obtained its bank license in 1985, and listed in 1996. It’s Australia’s only sizable listed investment bank, now internationally diversified, operating in asset management, banking and wealth, risk and capital solutions, and advisory.

(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.