Tag: Top Stocks

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Dividend Stocks

Aviva Is Shifting the Focus of Its Business

Business Strategy and Outlook

As a good middle-of-the-road insurer Aviva has had its fair share of problems over the years. As with many previously poorly run companies, these issues have stretched across leverage, controls, turnover and likely relatedly, its sprawling business portfolio. While prior leadership teams tried to get a handle on this business, up until now none have really done so. This is mainly attributed to a focus on growth and innovation, without a focus on strong capital management and discipline. Mark Wilson’s tenure was characterized by the Friends Life acquisition, the digital garage and his appointment at BlackRock. It felt like Maurice Tulloch would tilt the business more toward general insurance but we think it is likely that the business’ problems became too much for him. Present CEO Amanda Blanc is now set on making things right and has divested noncore assets, promising now to focus on the U.K., Ireland, and Canada.

Aviva is not a highly differentiated business and does not have a strong strategy. As a middle of the road business, reinvestment is critical. Two of its three objectives have been achieved and those are focus and financial strength. However, what is yet to be seen is how Blanc will transform the remaining assets into a collection of units that are better than they are and perhaps approaching market-leading. From what has been seen, this is about investing in exceptional customer service and it’s hard to imagine anyone disputing that need. All too often that falls by the wayside in this segment of financial services. However, there is no disputing that excellent customer service has tangible and financial benefits. It leads to lower customer turnover and lower acquisition costs both in terms of volume and margin. Lastly, this is largely a long-term savings business so accretive investment in Aviva Investors will be crucial.

Financial Strength

Aviva has a weak balance sheet. Aviva’s debt is a little over half of its shareholders’ equity. Most of this is core structural borrowings that are held by the center. Pleasingly, management has decided to appease investors with a near GBP 2.0 billion debt reduction in 2021 and a further GBP 1.0 billion debt reduction program over the coming years. This debt reduction plan has been assisted by the GBP 7.5 billion raised from the eight business sales. This has provided management with plenty of room to commence a GBP 1.0 billion buyback on top of the deleveraging. The net of these actions is anticipated to substantially improve the business’ leveraged position. The interim dividend for 2021 was increased to GBX 7.35 per share and the total dividend for the year will be GBX 22.0. This means a final of GBX 14.7 per share for full-year 2021. Guidance is for a dividend of GBX 31.5 for full results of 2022.

Bulls Say’s

Aviva’s new CEO is still making good strides to focus, transform, and simplify the business.

Leverage has been an issue, and this is a primary focus of the new management team.

Targeted capital remittance plans provide a nice buffer for further buybacks or business reinvestment.

Company Profile

Aviva is a multiline insurer headquartered in the United Kingdom. It traces its roots back to the late 1700s with the establishment of the Hand-in-Hand Fire Office, a mutual insurer of loss from fire. This mutual, along with many other entities acquired and established over the years, was purchased by Commercial Union in 1905. In the late 1990s, Commercial Union and General Accident merged to form Commercial General Union, or CGU. A few years later CGU and Norwich Union merged and later rebranded as Aviva. Aviva acquired Friends Life in 2015. Aviva has been through quick successions of leadership in recent years. Mark Wilson served as CEO in the five years between 2013 and 2018. Then Maurice Tulloch took over and led up to July 2020. Amanda Blanc has led since then.

(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.

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Dividend Stocks

Medibank Remains a Relatively Defensive Company Heading into an uncertain Economic Environment

Business Strategy & Outlook:   

Medibank is Australia’s largest private health insurer operating under the Medibank and Ahm brands. The dual-brand strategy has successfully allowed the group to offer differentiated pricing and messaging to grow members and profits. Despite the “free” universal public system in Australia, around 45% of Australia’s population have private hospital cover due to taxation benefits and penalties, shorter waiting times, and a choice of doctors and hospitals. Government policy settings, which promote the take up and retention of private health insurance products, to remain in place. With an ageing population, higher demand for more intense healthcare will put further pressure on the public health system. Medibank’s current strategy, which has seen growth in policyholder numbers and margins, should see the positive trends continue. Initiatives included increasing the number of service providers where individuals pay no-gap, introducing reward programs (such as discounts) for members, investing in the digital offering to make it easier to lodge claims, adding tools and resources such as 24/7 nurse teleservice, and a new focus on in-home care. To help support margins there has also been a renewed focus on claim costs. 

Medibank secured audit rights with hospitals, which allows the insurer to investigate where rehabilitation referrals of a hospital exceed industry averages andit expanded efforts to identify errors in claims made by hospitals. Despite larger players generating a respectable return on equity on mid-single-digit profit margins, smaller providers have less capacity to absorb the expected claims inflation. This could eventually lead to industry consolidation, or at the least a pullback in marketing expenses and policyholder acquisition costs. Medibank’s Other Health Services division provides in-home healthcare services such as nursing, rehabilitation, and health coaching for corporates. Medibank health also includes the sales of travel, life, and pet insurance, where Medibank is not the underwriter but is paid a commission. 

Financial Strengths:  

In a debt-free position Medibank is in sound financial health. Medibank can fund long-term organic growth from cash flows, while maintaining the current 75% to 85% target dividend payout range. As at Dec. 31, 2021, Medibank held AUD 1.95 billion in capital, equating to 13% of annual premiums, the top end of the firm’s 11%-13% target range. Given low claims volatility in health insurance the insurer could carry some debt, but given a large acquisition is not expected, the conservative balance sheet is likely to remain a feature of Medibank. Investment assets of AUD 2.8 billion were allocated 18% to cash, 61% to fixed income, and 21% to equities, property and other assets as at Dec. 31, 2021. 

Bulls Say:  

  • Industry growth is tied to a steadily increasing population, ageing demographics and the rise in healthcare spending. Governments will continue to incentivize participation in private health insurance to share the burden of escalating healthcare costs.
  • Premium growth is generally tied to the increasing cost of healthcare.
  • The symbiotic relationship with the private hospital operators and buyer power over general practitioners is a key strength of Medibank’s business model. The majority of private hospital income is paid by the insurers. 

Company Description:  

Previously owned by the Australian government, Medibank is the largest health insurer in Australia. Its two brands, Medibank Private and ahm, cover over 4.8 million people. Medibank and Australia’s fourth-largest health fund NIB Holdings are the only listed health insurers. In addition to private health insurance, the firm provides life, pet, and travel insurance, as well as health insurance for overseas students and temporary overseas workers. The Medibank Health division provides healthcare services to businesses, governments, and communities across Australia and New Zealand.

(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

Entergy to invest more than $4 billion annually for at least the next five years to upgrade its expansive grid

Business Strategy and Outlook 

Entergy’s growing, energy-hungry Southeast U.S. service territory and constructive state regulatory frameworks give it a long runway of earnings and dividend growth potential. Entergy will invest more than $4 billion annually for at least the next five years to upgrade its expansive grid and build out its renewable energy portfolio. Much of this investment has strong support from industrial customers trying to electrify and decarbonize their businesses. Entergy’s investment opportunities and customer growth will lead to annual earnings growth in line with management’s 6%-8% target. Entergy has made a substantial strategic transformation during the last few years. It was the second-largest U.S. nuclear owner for nearly two decades with six plants in the Northeast and four rate-regulated plants in the Southeast. The plants in the Northeast at their peak earned more than Entergy’s rate-regulated utilities. But they became a drag on earnings, dividends, and shareholder returns as power prices fell and never rebounded. 

Management began exiting the business in 2014 by selling and retiring the plants, most notably the Indian Point units that supplied as much as 25% of New York City’s electricity but succumbed to antinuclear policymakers. Entergy closed its last nonutility nuclear plant, Palisades (Michigan), this year. Entergy has turned over decommissioning responsibilities to other companies, eliminating the risk of unexpected decommissioning costs.

As a predominantly rate-regulated utility, Entergy no longer has direct energy market exposure. Entergy’s unique risk is severe storms that hit its service territory regularly. From Hurricane Katrina to Ida and many in between, Entergy regularly faces billion-dollar storm repair costs. Regulators have a long history of allowing Entergy to recover those costs from customers, limiting the financial risk for shareholders. Given the exit from Northeast nuclear generation and the growth potential of Entergy’s utilities, the dividend might increase to track earnings growth.

Financial Strength

The strong industrial growth in the Mississippi Delta region will be one of the main drivers for more than $4 billion of investment annually at Entergy’s utilities during the next five years. Entergy’s balance sheet rightsizing and constructive regulation that enhances cash flow should limit the amount of new debt and equity that the company has to issue to fund its growth program. Entergy enters its large investment program with a strong balance sheet. The approximately $5 billion of impairments or other costs associated with the exit of the merchant nuclear business had weakened its balance sheet, but Entergy has put that behind it. The current leverage is manageable, considering the diversity and consistency of the company’s utility earnings. In October 2021, Entergy’s board raised the dividend $0.24 per share annualized, or 6%, to $4.04, the largest increase since 2010 and are in line with the expectations. Entergy had been raising the dividend $0.08 per share annually, or about 2%, since 2015 and didn’t raise the dividend between 2010 and 2015, constrained by weak performance at the competitive generation business and capital investment needs at the utilities. With the exit from the competitive generation business, the dividend might increase to track earnings growth.

Bulls Say’s

  • Industrial electricity rates that are well below the U. S. average are driving strong industrial development in the Mississippi Delta region and electricity sales growth.
  • The board raised the dividend 6% for 2022, the largest increase in a decade. The dividend growth is to continue at a similar rate for the foreseeable future. 
  • The decision to exit the merchant nuclear business demonstrates good capital allocation as merchant nuclear earnings had high variability.

Company Profile 

Entergy is a holding company with five regulated integrated utilities that generate and distribute electricity to about 3 million customers in Arkansas, Louisiana, Mississippi, and Texas. It is one of the largest power producers in the country with approximately 23 gigawatts of regulated utility-owned power generation capacity. Entergy was the second-largest nuclear owner in the U.S. before it began retiring and selling its merchant plants in 2014.

 (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

Workday Doesn’t Take a Day Off When It Comes to Its Positive Moat Trend

Business Strategy & Outlook:  

Workday to be a best-of-breed cloud-only platform for human capital management software. By debuting in 2005 as a first mover in cloud HCM at an ideal time—when enterprises were looking to make the move from on-premises to cloud software solutions—Workday has benefited from its timeliness as well as its high-quality product and reputation for smooth implementations. Now that customers have transitioned to a cloud solution with Workday, the possibility of another vulnerable event like the cloud migration that would leave the company susceptible to customer switching, is unlikely. Instead, seeing wide-moat Workday as having robust switching costs which, will only get stronger as the company builds on its core HCM offering.

Workday is now the HCM platform for approximately 60% of the Fortune 50 and 50% of the Fortune 500 as of fiscal 2022. Workday been able to take share from legacy employee resource planning software companies Oracle and SAP, which is tough enough based on the switching costs which are inherent in most ERP software; even more impressive is that Workday has been able to do so by initially unbundling HCM software from the ERP ecosystem. By doing so, customers understand that they will need to go through integrations between different ERP solutions by mixing and matching, but in return, they hope to get the best-of-breed HCM solution—and pay a premium for Workday. Now, Workday is in its next chapter of allowing the option to “rebounded” HCM with other ERP solutions as it now offers a financial management suite and planning suite, boosted by the acquisition of Adaptive Insights. As its core addressable market continues to expand and it finds adoption of its new products to be strong, Workday is poised for continued robust top-line growth and strengthening switching costs.

Financial Strengths: 

Workday is in healthy financial standing. As of fiscal 2021, Workday had $3.5 billion in cash and equivalents versus $1.8 billion in debt, all of which is composed of convertible notes. Workday is currently unprofitable on a GAAP basis, which has us monitoring the company’s cash cushion carefully. Even if Workday were not to issue any more convertible notes, or other forms of debt, Workday will have enough of a cash cushion to make it into its years of GAAP profitability. Workday does not need to use acquisitions as a crutch for growth, and thus acquisition spending will be more moderate over the next 10 years compared with spending over fiscal 2019 and 2020. The assumptions are also based on expectations that capital expenditure will continue to grow at a slower rate than Workday’s top line as it pertains to real estate and data center investments.

Bulls Say: 

  • Workday’s planning and analytics solutions should take off after COVID-19 has enterprises placing more importance on top-down planning. This should drive further customer and ACV growth, and thus revenue growth.
  • Quicker expansion into markets outside North America should allow for more operating leverage than previously expected.
  • Increasing attach rates among Workday’s offerings, such as its core HCM software and its emerging financials business, should allow Workday to exert further pricing power, driving revenue growth.

Company Description:  

Workday is a software company that offers human capital management, financial management, and business planning solutions. Known for being a cloud-only software provider, Workday is headquartered in Pleasanton, California. Founded in 2005, Workday now employs over 12,000 employees.

(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
Technology Stocks

NextDC’s total recurring revenue, will trend higher over time as its network ecosystem matures

Business Strategy & Outlook

NextDC is well placed to benefit from industry megatrends, including the growing adoption of cloud computing, the Internet of Things, and artificial intelligence, leading to exponential growth in data creation. The NextDC will materially expand its capacity over the 10-year forecast period in order to meet growing demand for data center services.

The COVID-19 pandemic has accelerated the digital transformation of many businesses and expedited demand for co-location data centers. Large numbers of employees have transitioned to remote working arrangements leading to a greater reliance on digital technologies such as video conferencing and cloud-based platforms and reducing the need to store servers at a centralized location. Beyond the COVID-19 pandemic, remote working levels to remain elevated above prepandemic levels resulting in continued demand for digital technologies and potentially less need for physical office space. This shift has increased demand for data centers and hybrid and multi cloud data storage solutions, which are supported by co-location data centers like NextDC. Hybrid solutions that combine traditional infrastructure with cloud storage can improve business outcomes through reduced latency and costs, increased security and resilience, and the flexibility to connect to multiple clouds based on business needs. These solutions provide greater flexibility and allow businesses to scale their data storage capacity based on workflow. The interconnection services to become increasingly important for NextDC as more businesses transition to hybrid cloud storage models. As at fiscal 2021, interconnection revenue contributed 8% of NextDC’s total recurring revenue, and this will trend higher over time as its network ecosystem matures.

Financial Strengths

NextDC is in sound financial health. The company raised AUD 862 million in fiscal 2020 via an institutional placement and share purchase plan. Proceeds from the equity raising will be used to fund the development of a third Sydney data center and further capacity expansion at its existing and new sites. The gearing, measured as net debt/EBITDA, to deteriorate to above 3.6 times in fiscal 2023 as NextDC continues to invest heavily in portfolio expansion, before recovering from fiscal 2024 as capacity utilization improves. The NextDC will invest about AUD 4.0 billion during the 10 years to fiscal 2031 to grow total power capacity at a CAGR of 16%. The NextDC will only consider paying dividends when it has accrued sufficient franking credits, otherwise the capital would be better spent on investments or repaying debt.

Bulls Say

  • NextDC is well placed to benefit from industry megatrends including the growing adoption of cloud computing, the Internet of Things and artificial intelligence leading, to exponential growth in data creation. 
  • The shift to cloud-based services increases the need for enterprises to connect to numerous cloud providers and the connection is fastest, safest and most efficient in a co-located data center. 
  • The COVID-19 pandemic has accelerated the digital transformation of many businesses and led to increased demand for cloud-based services that require data centers.

Company Description

NextDC is an Australia data center developer and operator with a focus on co-location and interconnection among enterprise and government customers, global cloud and information and communications technology, or ICT, providers, and telecommunication networks. NextDC provides physical space, cooling, power, and security services and offers optional technical and project management support. The company’s tenants house their servers within the data center and can connect to each other via physical and virtual connections.

(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
Technology Stocks

Cellnex to finance future acquisitions with a combination of rights issues and new debt, as it has done in the past

Business Strategy & Outlook

Cellnex is the only pure independent tower firm of large scale in Europe (Inwit and Vantage are not independent, as they are controlled by mobile network operators). Cellnex’s strategy is to acquire European wireless tower portfolios from MNOs and then lease the towers back to those MNOs while adding other tenants to take advantage of the towers’ operating leverage. MNOs find value in Cellnex’s proposition as they can monetize towers at good valuations and use the proceeds to reduce debt. Transactions are structured as sale and leasebacks and provide Cellnex with long-term revenue and cash flow visibility underpinned by its contracts (10- to 25-year durations), which include annual rent escalators often tied to inflation.

When Cellnex acquires a tower portfolio, the MNO signs a long-term contract with Cellnex and becomes an “anchor tenant” on the towers. Contracts, known as master service agreements, allow Cellnex to move anchor tenants between towers, which lets it realize efficiencies (decommission redundant towers, build new towers with two tenants instead of one, or avoid unnecessary land lease costs) and improve returns on invested capital. Cellnex’s strategic priority is to own at least two tower portfolios in each of the markets where it operates, as having several portfolios allows for more efficiencies. The company owns at least two portfolios in each of France, Spain, Italy, Portugal, Switzerland, Poland, and the United Kingdom. The Cellnex will keep acquiring towers in Europe, with a focus in Germany, Scandinavia, or Austria, regions where it currently owns none or only one tower portfolio. Cellnex has reached a scale of almost 100,000 towers since its inception in 2015 by acquiring towers from operators like Telefonica, Iliad, Bouygues, Altice, and CK Hutchison, among others. Deals are usually structured as asset deals, so they typically come with fewer integration burdens, which is positive for an acquisitive company like Cellnex. The Cellnex to finance future acquisitions with a combination of rights issues and new debt, as it has done in the past.

Financial Strengths

As of December 2021, Cellnex had EUR 11.7 billion in net debt excluding leases, which implies a net debt/EBITDA (after leases) ratio of around 5.5 times at the end of 2022. Although this ratio may seem elevated, it is reasonable, as tower companies can manage high leverage due to long-term contractual revenue and high cash flow visibility linked to inflation. Cellnex’s leverage is also in line with other peers in the sector, such as American Tower and Inwit. As the European tower industry consolidates and fewer M&A opportunities are available, we expect the firm to steadily reduce leverage. Of Cellnex’s debt, 80% is fixed-rate, providing protection against interest-rate increases. Cellnex’s debt is nonrecourse, which means the debt is associated with the assets but not to the company (the issuer can seize the collateral—towers—but cannot go after the firm for additional compensation).

Bulls Say

  • Cellnex provides high cash flow visibility to investors, with inflation protection and growth optionality coming from new tenants. It is also protected against COVID-19 headwinds as critical infrastructure is still needed in lockdown times. 
  • Cellnex has the opportunity for more M&A deals. Tower portfolios in Germany, Scandinavia, or Austria could be acquired, which could enhance operating leverage and drive better returns on capital. 
  • Cellnex is well hedged against inflation risk and interest-rate increases through its inflation-linked contracts and fixed-rate debt.

Company Description

Cellnex owns and operates almost 100,000 wireless towers in Europe, resulting from continued M&A activity since its IPO in 2015. It has acquired towers from several European mobile network operator, including Telefonica, Iliad, CK Hutchison, Bouygues, and Altice. Cellnex is present in more than 10 European countries as of December 2021, including France, Italy, Spain, Poland, the U.K., Switzerland, and Portugal. Cellnex’s strategy is to acquire portfolios from MNOs and lease the towers back to them through long-term contracts, which provide high cash flow visibility and inflation protection.

(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
Technology Stocks

Fortinet at the Forefront of Networking and Security Converging

Business Strategy & Outlook

Fortinet is a leading cybersecurity company that has amassed an extensive customer base because of its solutions’ high performance relative to price as well as its broad product offerings covering various security concerns. The company developed a centralized cybersecurity management plane and is at the forefront of networking and security converging with its secure software-defined wide-area networking offerings. Fortinet sells security appliances and subscriptions as well as technical and professional services. It has established customer switching costs alongside its network effect and has a nice runway for growth through its holistic approach to network and cloud cybersecurity. As organizations expand their networking footprint beyond on-premises data centers, Fortinet keeps customers locked into its ecosystem via holistic security management across any location. 

The vast creation of data and the dispersed nature of network traffic due to hybrid environments, software-as-a-service applications, and remote access needs create a larger threat surface. Attacks are becoming more masqueraded and serpentine, which drives up the complications associated with cybersecurity management and threat prevention. Fortinet gleans threat insights from its massive customer base, which keeps it at the forefront of security requirements. Compounded by a dearth of cybersecurity talent, consolidated security platforms like Fortinet’s Security Fabric will remain in high demand, as customers prefer to add capabilities via subscriptions over managing disparate software and hardware vendors. The company has a build-versus-buy mentality, with a penchant for making custom processors. While this strategy has helped establish its name within the perimeters of localized networks, Fortinet is expected to supplement its engineering prowess with inorganic growth in areas like cloud-based security, machine learning, and automated threat responses. These high-growth areas can help drive new product growth on top of a considerable base of durable services and support income.

Financial Strengths

Fortinet is considered a financially sound company that will continue to generate strong cash flow. At the end of 2021, Fortinet’s deferred revenue of $3.5 billion is a strong indication of predictable revenue streams and should help insulate the company from any IT spending downturns. Fortinet had $3.0 billion in cash and equivalents and $1 billion of debt at the end of 2021. The company has never paid a dividend, but used over $2 billion to repurchase shares between 2017 and 2021, and Fortinet is anticipated to continue repurchasing shares. Beyond returning capital, cash outflows are expected to be focused on research and development alongside sales and marketing efforts and with some smaller tuck-in acquisitions to be completed for areas such as cloud-based security and analytics.

Bulls Say

  • A growing enterprise customer base and nascent technologies like software-defined networking and 5G create sizable revenue growth potential for Fortinet. 
  • The firm’s consolidated cybersecurity platform could be enticing for customers attempting to decrease the quantity of vendors, which would drive more revenue per customer for Fortinet. 
  • With no end to cybersecurity threats, Fortinet’s products should remain in high demand from SMBs, government entities, service providers, and enterprises.

Company Description

Fortinet is a cybersecurity vendor that sells products, support, and services to small and midsize businesses, enterprises, and government entities. Its products include unified threat management appliances, firewalls, network security, and its security platform, Security Fabric. Services revenue is primarily from FortiGuard security subscriptions and FortiCare technical support. At the end of 2021, products were 38% of revenue and services were 62% of sales. The California-based company sells products worldwide.

(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
Technology Stocks

Square’s initial success came largely from expanding the acquiring market, as opposed to stealing material share from existing players.

Stock exchange market concept, stock broker looking at graph working and analyzing with display screen, pointing on the data presented and deal on a exchange, Businessman trading stocks online.

Business Strategy & Outlook

The Block’s business model on the merchant side, characterized by efficient client onboarding, innovative point-of-sale devices, flat fees, and an internally developed and integrated set of software solutions, allows the company to reach and retain micro merchants that are unviable for other acquirers. In essence, the Square’s initial success came largely from expanding the acquiring market, as opposed to stealing material share from existing players.

To develop sufficient scale, Square needed to move past its micro merchant base, and recent results suggest it is doing just that. At this point, only about two thirds of its payment volume comes from merchants generating over $125,000 in annual gross payment volume. Furthermore, absolute growth in clients above this threshold has accelerated meaningfully over the past couple of years, while absolute growth in merchants below this threshold has largely held steady. The move upstream and cross-selling will allow Square to materially improve margins in the years ahead and show the viability of its business model. But Square as a narrow-moat niche operator, not a disrupter, with market share limited by its relatively high pricing and long-term margins constrained by its relative lack of scale. The Clover has proven itself a strong competitor and appears to be outperforming Square. The company’s effort to build out a consumer business surrounding its Cash App creates option value, and the more uncertainty on this side of the business. Block is competing in a space with winner-take-all dynamics, and its competitors have large consumer customer bases, which can justify some initial skepticism. However, Cash App’s performance compared with peers has been relatively strong, suggesting it is positioning itself to be a longtime leader in the space.

Financial Strengths

The Block is in a solid financial position. Historically, it has avoided carrying a meaningful amount of debt, which seems appropriate given that the company remains unprofitable. However, the company had about $5 billion in debt on the balance sheet at the end of 2021. Absent one-time gains, Block remains unprofitable on a GAAP basis. But stock compensation makes up a significant portion of its expenses. As such, the company did turn free-cash flow-positive in 2017, and the improving profitability will increase free cash flow meaningfully in the coming years. The capital-light nature of the business creates significant financial flexibility, and the company should have room to consider cash-based acquisitions to fill in any product holes.

Bulls Say

  • The ongoing shift toward electronic payments has created, and will continue to create, room for payments companies to see strong growth without stealing share from each other. 
  • Ancillary services are becoming a more critical engine for growth and will help Square fully monetize its merchant client base and improve margins. 
  • Electronic payment growth is shifting overseas, and Square’s business model looks portable into international markets, as the company does not rely on a large local salesforce to attract merchants.

Company Description

Founded in 2009, Block provides payment acquiring services to merchants, along with related services. The company also launched Cash App, a person-to-person payment network. Block has operations in Canada, Japan, Australia, and the United Kingdom; about 5% of revenue is generated outside the U.S.

(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
Technology Stocks

McKesson deepens its relationship with customers through offering marketing merchandising, and administrative support.

Business Strategy & Outlook

McKesson is a leading domestic wholesaler of branded, generic, and specialty pharmaceutical products. With over $180 billion in annual U.S. drug distribution revenue, McKesson supplies nearly one third of the overall market, comparable to AmerisourceBergen and slightly outpacing Cardinal Health in market share. Together, the three operate as a pharmaceutical wholesale and distribution oligopoly, supplying over 90% of the U.S. market. The highly consolidated pharmaceutical wholesale market reflects the substantial scale-based cost advantages held by the largest players.

Wholesalers play a central role in the pharmaceutical supply chain, bridging the gap between over 1,200 drug manufacturers and pharmacy, health system, and provider customers. The primary value proposition to manufacturers is the simplification in distribution logistics by shipping products to centralized wholesaler locations, as opposed to shipping direct to the tens of thousands of pharmacies or healthcare provider locations. Additionally, since McKesson takes legal ownership over the manufacturer’s product, the company effectively absorbs all credit risk associated with delinquent pharmacies, clinics, and providers. Beyond its role as an intermediator, McKesson offers consulting services directly to manufacturers, from clinical trial support through post approval commercialization. Similarly, wholesalers’ primary value proposition to pharmacy and healthcare provider customers is simplification in logistics. McKesson uses its scale to negotiate more effectively than most of its customers and typically acquires drugs at the lowest available price, most of which is passed along in cost savings. In addition, McKesson bears the burden of substantial working capital outlays associated with its comprehensive drug inventory, delivering smaller quantities directly to customer retail locations as needed. Beyond acting as an efficient supplier, McKesson deepens its relationship with customers through offering marketing, merchandising, and administrative support services to smaller independent pharmacies and providers.

Financial Strengths

As of fiscal year-end 2021, cash and equivalents were over $6.3 billion, offset by $7.1 billion in debt. Fiscal 2021 gross leverage was 1.7 times adjusted EBITDA. Free cash flow generation was $4.1 billion in the same period, but free cash flow growth will be slightly muted in the forecast period, associated with opioid settlement payments over the next 18 years. The McKesson enjoys a position of solid financial strength arising from its strong balance sheet and dominant position in a mature market with substantial scale-based barriers to entry. Working capital requirements are high in the industry, as pharmaceutical wholesalers take title, or legal ownership, over the drugs they distribute. However, McKesson’s favorable cash conversion cycle mitigates this risk and reflects its strong negotiation leverage with manufacturers and customers in establishing payment terms.

Bulls Say

  • McKesson distributes pharmaceutical products to nearly one third of the industry, leading to substantial negotiation leverage with generic drug manufacturers. 
  • The industry has largely pivoted away from pharmacy owned warehouses and self-distribution, solidifying wholesalers’ role in the supply chain. 
  • Recent data suggests generic drug price deflation and has eased in the past year, relieving a contributing factor toward wholesaler margin compression.

Company Description

McKesson is a leading wholesaler of branded, generic, and specialty pharmaceutical products to pharmacies (retail chains, independent, and mail order), hospitals networks, and healthcare providers. Along with AmerisourceBergen and Cardinal Health, the three account for well over 90% of the U.S. pharmaceutical wholesale industry. McKesson is currently divesting from its pharmaceutical wholesale and distribution in Europe and Canada in order to redeploy capital to strategic growth areas in the U.S. (oncology network and ecosystem, and biopharma services). Additionally, the company supplies medical-surgical products and equipment to healthcare facilities and provides a variety of technology solutions for pharmacies.

(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

BCE distinguishes itself from competitors with a high-quality and diversified media unit

Business Strategy and Outlook

BCE has been investing heavily to upgrade its wireline network by extending fiber to the home, or FTTH, which is thought to be of positions the firm to take share over its footprint. BCE also remains a leader in providing wireless service throughout Canada and has a formidable media business. BCE is the biggest Canadian broadband provider, with nearly 4 million high-speed internet customers at the end of 2021 and a footprint that reaches three fourths of the nation’s population. Its two biggest competitors, cable companies Rogers (in Ontario), and Videotron (in Quebec) have about 2.5 million and 1.8 million subscribers, respectively. As a legacy phone provider, BCE has historically had an inferior network, contributing to better penetration rates for Rogers and Videotron. It is alleged FTTH will meaningfully reduce operating costs, allow BCE to offer speeds comparable to or better than competitors, and charge higher prices. 

It is anticipated BCE is second to none in Canadian wireless and expect it to remain atop with market with Rogers and Telus. However, it is likely for the wireless market to remain competitive and believe pricing will remain under pressure for the incumbents, even if the Shaw merger with Rogers is completed, due to regulatory scrutiny. Long term, it is held average revenue per user will be fairly stagnant, which will limit the firm’s ability to expand wireless margins. BCE also distinguishes itself from competitors with a high-quality and diversified media unit (Rogers is the only other Canadian telecom firm with media exposure, and it held BCE’s has superior assets). Crave is BCE’s over-the-top video-on-demand service available throughout Canada with a wealth of content, including from HBO, Showtime, and Starz. BCE is also the exclusive provider of HBO Max content in Canada and owns Canada’s top network (CTV) and top sports station (TSN). In total, BCE owns or has exclusive Canadian rights to 30 television channels, over 100 radio stations, an out-of-home advertising business, and broadcast rights for a multitude of sports teams, leagues, and events.

Financial Strength

Although BCE ended 2021 with a net debt/EBITDA ratio of 3.0, above the 1.75-2.25 that it targets, and it is alleged the leverage ratio to stay above the firm’s target range throughout expert’s five-year forecast, it is viewed the firm’s financial position as strong and likely to improve. At the end of 2021, the company had CAD 207 million in cash, and an interest coverage ratio (adjusted EBITDA to interest expense) of over 9.0. BCE has CAD 1.5 billion to CAD 2.6 billion maturing each year between 2022 and 2025, but it isn’t anticipated it will have difficulty rolling the obligations over. BCE also had about 3.5 billion of available liquidity at the end of 2021 thanks to its committed credit facility. Higher debt levels in recent years are attributable to acquisitions (the biggest of which was the acquisition of a portion of MTS’ business for close to CAD 1.5 billion in cash), spectrum purchases, its fiber-to-the-home network buildout, and cash needs for pension funding. Although it is likely BCE will continually participate in spectrum auctions, it is unforeseen any upcoming auctions that will be as big as 2021’s 3500 MHz auction, where BCE spent CAD 2 billion. It is also likely capital spending to come down significantly after 2022, as the firm passes the accelerated portion of its fiber buildout, and it isn’t alleged any big mergers or pension contributions, as the company has eliminated its pension deficit. These should result in higher free cash flow that can go toward paying down debt. It is still held the company has sufficient flexibility should opportunities arise. BCE has increased its dividend by at least 5% each year since having to cut it during the financial crisis in 2008. The increase has been right at 5% each year since 2015, and it is probable that to be the norm through 2026. It is probable share repurchases to be minimal for the foreseeable future, consistent with the recent pattern.

Bulls Say’s

  • The immense network improvement that will result from BCE’s fiber-to-the-home buildout will lead to wireline share gains and margin improvement. 
  • With the Canadian wireless market far less penetrated than the U.S. and Europe, a long growth runway exists. As an industry leader, BCE is well positioned to take advantage. 
  • BCE’s fiber-to-the-home buildout leaves it well positioned for a transition to 5G, which will require significant fiber capacity

Company Profile 

BCE is both a wireless and internet service provider, offering wireless, broadband, television, and landline phone services in Canada. It is one of the big three national wireless carriers, with its roughly 10 million customers constituting about 30% of the market. It is also the ILEC (incumbent local exchange carrier–the legacy telephone provider) throughout much of the eastern half of Canada, including in the most populous Canadian provinces–Ontario and Quebec. Additionally, BCE has a media segment, which holds television, radio, and digital media assets. BCE licenses the Canadian rights to movie channels including HBO, Showtime, and Starz. In 2021, the wireline segment accounted for 54% of total EBITDA, while wireless composed 39%, and media provided the remainder. 

(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.

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