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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)

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

Aurizon Holdings Ltd operates an integrated heavy haul freight railway in Australia

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.

Categories
Technology Stocks

Verisign will continue to meet its contractual obligations and for the registry agreements to renew into perpetuity

Business Strategy and Outlook 

Verisign provides registry services for several top-level domains, or TLDs, and infrastructure essential to the functioning of the Internet. Verisign plays a vital role in supporting the Domain Name System, or DNS, which is akin to a massive address book that matches human friendly domain names to the accompanying numbers-based Internet Protocol, or IP, address. This allows an end user to browse the Internet and access requested content via a network of interconnected servers. The company operates software and infrastructure globally to support the translation of domain names to IP addresses for its assigned domains, including managing zone files and registration and policies for the specified domain. Verisign also provides root zone maintenance services, operates two of the world’s 13 roots servers that are foundational to the DNS, and manages a shared registration system that allows registrars to query the availability of and manage second level domains. Verisign has exclusive registry rights for two of the world’s most popular TLDs, .com and .net, under renewable contracts with the Internet Corporation for Assigned Names and Numbers, or ICANN. The lucrative contracts run for six years and have a presumptive right of renewal provided Verisign meets its contractual obligations. The .com and .net contracts are up for renewal in 2024 and 2023, respectively. 

Per the current contract terms, Verisign may raise .com pricing by up to 7% per year for the last four years of the contract and .net by up to 10% per year. Verisign currently charges $8.39 per year for a new or renewed .com domain and $9.02 for .net domain. Verisign will maximise price increases for .com within the limits of the contract, the company can still generate attractive returns in the event of tighter pricing controls. Verisign will continue to meet its contractual obligations and for the registry agreements to renew into perpetuity, underpinning the wide moat rating. The company has provided uninterrupted DNS services for over 25 years and continues to invest in infrastructure and cybersecurity measures to mitigate the risk of service disruptions.

Financial Strength

Verisign is in a sound financial position. As of year-end fiscal 2021, the company had a net debt position of about $580 million and reported $1.79 billion of long-term debt from senior unsecured notes. The company also has access to at least $200 million of liquidity under an unsecured revolving credit facility. Under these agreements, Verisign is subject to certain operating and financial covenants and must not exceed certain gearing ratios. Verisign will remain compliant with these covenants and meet interest and maturity payments on outstanding debt over the forecasted period. Verisign does not pay dividends but instead returns capital to shareholders through a substantial share repurchase program. The company has returned about $3.5 billion of capital to shareholders over the five years to fiscal 2021, which was funded through the company’s strong free cash generation and debt. As of February 2022, Verisign’s board has authorized an additional $1 billion of share repurchase, with no expiration.

Bulls Say’s

  • Verisign is to maximise price increases for the .com domain within the contractual limits, supporting further margin expansion. 
  • Verisign’s relationship with ICANN continues to strengthen as the company’s powerful track record of performance extends. 
  • While Verisign faces competitive pressure from competing TLDs, it is expected that .com is to remain the world’s most popular TLD.

Company Profile 

Verisign is the sole authorized registry for several generic top-level domains, including the widely utilized .com and .net top-level domains. The company operates critical Internet infrastructure to support the domain name system, including operating two of the world’s 13 root servers that are used to route Internet traffic. In 2018, the firm sold off its Security Services business, signalling a renewed focus on the core registry business.

(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

CNH to maintain its market share over smaller local and regional competitors with its full line of agriculture machinery

Business Strategy and Outlook 

CNH Industrial provides customers an extensive product portfolio of off-highway products. CNH will continue to be a top-two player in the agriculture industry. For generations, the company’s agriculture equipment has garnered intense brand loyalty among farmers. Customers value CNH Industrial’s high-quality and strong performing products, in addition to its robust dealer network. In developed markets, CNH Industrial helps customers reduce the total cost of ownership through improved fuel efficiency, limited machine down-time and consistent parts availability. The company’s off-highway strategy manufactures agriculture and construction equipment. CNH addresses the agriculture market with three brands: Case IH (targets large grain farmers) and New Holland (serves small grain, livestock farmers) make full lines of agriculture equipment, while Steyr is mainly a tractor manufacturer. The agriculture business is well positioned to compete with peers, but the construction business will need to optimize its dealer network, product portfolio and manufacturing operations to be competitive.

In early 2022, CNH spun off its on-highway business. The commercial vehicles and powertrain businesses will be owned by the Iveco Group. This decision was a prudent move for shareholders. With the demerger, management will now shift its focus to the more profitable, off-highway business. As a strong number-two player in agriculture markets, CNH is to maintain its market share over smaller local and regional competitors with its full line of agriculture machinery. In addition, the company’s high exposure to agriculture markets (over 90% of off-highway profits from the estimation) will bode well, as demand for new machinery will remain robust in the near term. CNH Industrial has exposure to end markets that have attractive tailwinds. In agriculture, demand for crops will be strong in the near term, largely due to robust demand from China and tight global supplies. In construction, increased infrastructure spending in the U.S. will be a benefit in the near term.

Financial Strength

CNH Industrial maintains a sound balance sheet. Outstanding industrial debt (excluding Iveco Group) at the end of 2021 stood at $9.2 billion. The captive finance arm holds considerably more debt than the industrial business, but this is reasonable, given its status as a lender to both customers and dealers. Total finance arm debt came in at $15.9 billion in 2021, along with $19.4 billion in finance receivables and over $800 million in cash. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of year-end 2021 stood at $4.3 billion on its industrial balance sheet. The comfort is in CNH Industrial’s ability to tap into available lines of credit to meet any short-term needs. The company has access to $3.9 billion in credit facilities. CNH Industrial maintains a strong financial position supported by a clean balance sheet and strong free cash flow prospects. CNH Industrial can generate solid free cash flow throughout the economic cycle. The company can generate over $1 billion in free cash flow In the midcycle year, supporting its ability to return free cash flow to shareholders, mostly through dividends. Additionally, management is determined to rationalize its product portfolio and manufacturing operations. The company is working to reduce a significant portion of its products in the construction business, refocusing their efforts on higher volume models. This will allow CNH Industrial to run leaner in its manufacturing operations. If successful, this will put CNH Industrial on much better footing from a cost perspective, further supporting its ability to return cash to shareholders.

Bulls Say’s

  • Higher crop prices increase farmers’ profitability, allowing them to purchase new agriculture equipment, which substantially boosts CNH Industrial’s revenue growth. 
  • CNH Industrial will benefit from strong replacement demand, as uncertainty around trade, weather, and agriculture commodity demand have eased, encouraging farmers to refresh their machine fleet. 
  • CNH improves the construction business by optimizing the product portfolio and dealer network. Additionally, increased infrastructure spending in the U.S. and emerging markets leads to more construction equipment purchases.

Company Profile 

CNH Industrial is a global manufacturer of heavy machinery, with a range of products including agricultural and construction equipment. One of its most recognizable brands, Case IH, has served farmers for generations. Its products are available through a robust dealer network, which includes over 3,600 dealer and distribution locations globally. CNH Industrial’s finance arm provides retail financing for equipment to its customers, in addition to wholesale financing for dealers; which increases the likelihood of product sales.

 (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
Dividend Stocks

HSBC Q2 Results Solid; Interim Dividend Reinstated in 2023

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.

Categories
Dividend Stocks

Williams Has an Attractive Collection of Gas Projects Over the Next Decade

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)

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