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Dividend Stocks

TLC is targeting payout ratio of 70-90% of NPAT excluding significant items and dividends are expected to be fully franked

Investment Thesis:

  • Trading below blended valuation.  
  • Strong market position – one of the largest retail distribution operations in Australia (over 7,000 points of distribution).
  • Exclusive and long-dated lottery licenses. 
  • Growth in digital channels to drive earnings and margin expansion – given digital enjoys economies of scale and does not pay commissions on sales.   
  • Defensive, high-quality earnings with low capital investments (high free cash flow) and resilience during economic downturns – infrastructure like qualities. 
  • Looking to acquire new licenses (e.g., Western Australia) and expansion overseas. 

Key Risks:

  • Increased competition from new operators leading to competitive bidding on new or renewals of existing licenses.
  • Covid-19 related impact should the virus and any associated lockdowns re-emerge (particularly for Keno).
  • Deterioration of the Australian economy will likely see discretionary spend impacted.
  • Loss of exclusivity (additional operators are given licenses) or key licenses.
  • Changes in the regulatory environment. 

Key Highlights:

  • The segment’s products range from instant scratch products to lifechanging prizes offered by Powerball. The Company operates under different brands in different states and offers 10 games – 7 core base games and 3 jackpotting games. 
  • The lottery industry is regulated at the individual state level and hence games are state specific.
  • TLC does operate national games – such as Powerball, Monday & Wednesday Lotto, Saturday Lotto, Oz Lotto and Set for Life – which are collectively operated under a contractual relationship between lottery operators.
  •  TLC operates Keno across most states in Australia – NSW, VIC, QLD, SA and ACT – and is provided to licensed venues such as hotels, clubs, casinos, TABs and online. Licenses in Tasmania, Western Australia and the Northern Territory are held by other operators however they utilise TLC’s Keno systems.
  • Upside from digital and strong portfolio of games to deliver solid medium to long-term growth.
  • Management expects top line growth for the business to be high single digit over the medium term (has been higher as well in recent periods), with upside coming from Oz Lotto game change and looking for a higher share of consumer gambling wallet.
  • International acquisition is on the cards but there aren’t too many options which suit management criteria – they want long tenure (license terms) and control (core competency of management is developing good games to be deployed over a period)
  • TLC is targeting payout ratio of 70-90% of NPAT excluding significant items and dividends are expected to be fully franked given earnings are all generated from Australia

Company Description:

The Lottery Corp (TLC) is Australia’s leading lottery operator with a portfolio of long dated, exclusive lottery licenses.  The Lottery Business (TLC) operates two segments: (1) Lotteries – holds exclusive, long-dated licenses to operate in all states of Australia except Western Australia and has a distribution network of over 3,800 outlets. (2) Keno – provides Keno products to venues in NSW, QLD, VIC, SA and the ACT. Keno is available in over 3,400 venues. As of Feb-22, the Company had 742 employees. 

(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

Canadian Imperial Bank of Commerce Closes Costco Card Book Acquisition; Expenses Creep up in Q2

Business Strategy & Outlook:   

Canadian Imperial Bank of Commerce is the fifth-largest bank in Canada by assets and one of six that collectively hold almost 90% of the nation’s banking deposits. CIBC is more Canadian-focused than some of its more international peers, although this is changing after the acquisition of Private Bancorp. The bank plans to eventually have up to 25% of revenue coming from the U.S. Despite having one of the larger domestic branch networks, CIBC’s products haven’t typically had top share in Canada, though the bank had made significant strides in multiple categories for years starting in 2011, as the bank increased share in multiple categories and increased product numbers per customer. This improvement has admittedly slowed down recently, although the bank took some incremental share again in 2021. 

Overall, CIBC has improved its core operating performance over the years, and while the improvement has slowed and the bank’s expense base is rising as CIBC continues to invest in technology and other aspects of the franchise, the bank making incremental improvements over the medium term. CIBC has encountered its own issues over the years, including multibillion-dollar write-downs in the aftermath of the global financial crisis. The bank had hit its stride since 2011, improving consumer satisfaction ratings, reoptimizing branches, improving internal processes, and expanding wealth operations. The bank is also seeing improved growth from its U.S. operations, which now contribute over 20% to earnings. CIBC has the highest concentration in uninsured Canadian mortgages. While the Canadian housing market is the same as the U.S. was in 2007, it is estimate a downturn in Canada could affect CIBC more than other Canadian banks. Although, a housing downturn as more of a threat to future growth rather than a threat to capital.

Financial Strengths:  

CIBC is in relatively good overall financial health. While outsize losses occurring in Canadian mortgages, CIBC does have the largest exposure here. In the event of a downturn, the bank would be able to deal with the fallout, although growth would decline as the Canadian consumer goes through a period of deleveraging. CIBC’s reported common equity Tier 1 ratio of 11.7% as of April 2022 remains satisfactory. Dividend payout shall remain close to 50% of net income. CIBC’s capital generation will continue to provide growth in its capital position, leaving room for bolt-on acquisitions, increased capital return to shareholders, or both.

Bulls Say: 

  • CIBC has significantly improved multiple measures of core banking performance, such as customer perception surveys, promoter scores, and products per a customer. The bank is now operating at a higher level. 
  • CIBC is more Canadian-focused than most of its peers. Its consolidated returns on tangible equity remain some of the highest in the industry.
  • The government has kept the Canadian market attractive by placing barriers to entry, protecting high returns, and the government will continue to attempt to keep the housing market under control, limiting any future hits to profitability.

Company Description: 

Canadian Imperial Bank of Commerce is Canada’s fifth-largest bank, operating three business segments: retail and business banking, wealth management, and capital markets. It serves approximately 11 million personal banking and business customers, primarily in Canada.

(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

Xero Ltd: Continued uplift in Lifetime Value (LTV) of Subscribers

Investment Thesis:

  • Competent leadership team with a proven track record of delivering strong growth (Strong top-line momentum driven by strong support of accountants and bookkeepers with annualised monthly recurring revenue increasing at CAGR 32% and strong subscriber growth with positive LTV (Lifetime Value) trends (over FY17-22, ANZ LTV grew at CAGR 34% and International LTV grew at CAGR 49%).
  • Solid product offering that is secure, scalable and efficient technology which is competing against competitors with technology that has legacy issues. We note that XRO’s small business platform is an ecosystem of more than 700 connected apps backed by a community of more than 50,000 users of XRO’s API developer tools. Going forward the Company could potentially increase its revenue by monetising its platform in other ways like charging third party app developers.
  • Potential for meaningful acquisitions to fill gaps in product capability. In our view, the Company is well positioned to make acquisitions going forward (given its balance sheet and funding status).
  • The Company continues to focus on cloud accounting, and we see significant upside potential in the sector given the fact that the current levels of small business cloud accounting adoption globally is estimated to be less than 20% of the total market or opportunity across English-speaking countries in which the Company operates.

Key Risks:

  • Decrease of migration to cloud software.
  • Currency headwinds due to weakening of NZ$ relative to AUD, USD and Pound.
  • Deteriorating sentiment if the economy and IT spending weakens.
  • Excessive competition from other established players like Intuit leading to loss of market share.
  • Inability to extract higher operational efficiencies as the Company scales up.
  • Issues in gaining market share especially in markets with established incumbents.
     

Key Highlights:

  • Total LTV increased +43% YoY to $10.9bn in FY22 (equating to 5-year CAGR of +34% for ANZ and +49% for International), equating to LTV/CAC (LTV/customer acquisition cost) of 6.9x (up +0.5x YoY), driven by good progress on subscriber growth, a marked improvement in average revenue per user (ARPU) of +7% YoY (+9% in CC), along with a -11bps YoY decline in monthly churn to 0.90%, which remained consistently below pre-Covid pandemic level. 
  • Operating revenue grew +29% YoY (+30% in CC) to $1.1bn, with Core accounting revenue up +23% driven by subscriber growth (up +19% YoY to 3.3 million) and ARPU increases (driven by price increases) and Platform revenue up +113% (to account for 11% of total operating revenue) driven by growth in payments, payroll and revenues from recently acquired businesses including Planday.
  • Gross profit increased +31% YoY to $957.4m with margin improving +130bps to 87.3% (includes the operations of Planday), largely due to efficiency gains in customer support teams and hosting costs for cloud-based products.
  • Total operating expenses, inclusive of acquisition integration costs, increased +39% YoY, reflecting greater investment in product design and development and sales and marketing expenses as travel cost resumed, resulting in -32% YoY decline in operating profit to $42m.
  • Net loss was $9.1m vs net profit of $19.8m in FY21, impacted by a fair value revaluation gain on contingent consideration of $38.9m, a new revenue incentive with Planday management resulting in a $10.5m expense and goodwill impairment relating to the acquisition of Waddle of $20.4m.
  • Free cash flows declined -96% YoY to $2.1m as +8% YoY increase in operating cashflow was more than offset by +117% YoY increase in investments. XRO has $150m of undrawn committed debt facilities.
  • Australia Market revenue increased +26% YoY (+27% in CC) to $483.3m with 229k net subscriber additions to reach a total of 1.34 million subscribers.
  • New Zealand Market revenue increased by +15% YoY to $149.4m with 66k net subscriber additions to reach a total of 512k.
  • UK Market revenue increased +30% YoY (+30% in CC) to $291.6m with 130k net subscriber additions taking total subscribers to 850k.
  • North America Market revenue increased +28% YoY (+31% in CC) to $72.6m, with 54k net subscriber additions to reach a total of 339k subscribers.
  • Rest of World (ROW) Market revenue increased +85% YoY (+90% CC) to $100m with subscribers increasing 51k to 226k. 

Company Description:

Xero Ltd (XRO) is a software as a service (SaaS) company, engaged in the provision of a platform for online accounting and business services to small businesses and their advisors. The Company operates through two operating segments: Australia and New Zealand (ANZ), and International (UK + North America + Rest of the World). 

(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

SL Green Realty Corp: The Manhattan net absorption rate remains negative as of first-quarter 2022

Business Strategy and Outlook

SL Green Realty is a real estate investment trust engaged in the acquisition, development, repositioning, ownership, and management of commercial real estate properties, principally office properties. Most of the companies’ properties are in the Manhattan area. The company held interests in approximately 35 million SF, which includes ownership interests in 26.7 million SF in Manhattan buildings and 7.2 million SF securing debt and preferred equity investments. The strategy of the company is to maintain a high-quality portfolio of buildings in desirable locations and focus on creating value through new developments, capital recycling, and joint venture investments. As an instance, SL Green’s $3 billion megaproject One Vanderbilt was completed amidst the pandemic and has already achieved high occupancy rates. 

The economic uncertainty emanating from pandemic recovery and the remote work dynamic have created a challenging environment for office owners. Employees are still hesitant in returning to the office as office utilization remains around 45% of the pre-pandemic level. The vacancy rate for office spaces in Manhattan was recorded at 21% in first-quarter 2022, which is roughly 1000 basis points higher than pre-pandemic levels. On the supply side, approximately 17 million SF of office space, which amounts to around 4% of the total inventory is currently under construction in Manhattan and would be added to the market in upcoming years. It is alleged this additional supply to further pressure fundamentals in the market. The Manhattan net absorption rate remains negative as of first-quarter 2022 and rental growth figures are disappointing especially given the highly inflationary environment. 

Having said this, an increasing number of companies requiring their employees to return to the office can be seen. In the long run, it is anticipated that remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centrepiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.

Financial Strength

It is likely, SL Green has relatively more debt compared with other office REITs especially after considering its share of debt in unconsolidated joint ventures. The firm owns a majority of its properties through unconsolidated JVs and these properties are significantly more leveraged than the firm’s balance sheet. However, it is bought to light that the unconsolidated JV debt is secured by the portfolio assets and have limited recourse to the parent company. The company’s share of debt which also includes its share of unconsolidated JV debt was $9.9 billion as of the end of first-quarter 2022, resulting in a debt/EBITDA ratio of 13.1 times. The current debt/EBITDA ratio is also high because of a lower base in the current challenging environment. It is held that, the figure should come down slightly over the next few years as fundamentals recover and EBITDA sees healthy growth. Having said this, it is absorbed that SL Green’s higher leverage implies a higher financial risk for the firm. The weighted average interest rate on the company’s debt was 3.11% and the debt maturity schedule shows that the maturities are adequately spread. Approximately 77% of the total debt is fixed-rate debt with the other 23% being floating rate debt. The debt service coverage ratio which is a ratio of EBITDA divided by interest and principal payments was 2.2 times as of the end of first-quarter 2022. The fixed-charge coverage ratio which is a ratio of EBITDA are divided by all fixed expenses (including interest) was 1.9 times as of the end of first-quarter 2022. The debt and fixed-charge coverage ratios are 3.8 times and 2.9 times, respectively, if only consolidated figures are considered. As a REIT, SL Green is required to pay out at least 90% of its income as dividends to shareholders. The FAD pay-out ratio which is a ratio of dividends to funds available for distribution was reported at 70% for the year 2021. This shows the firm is generating sufficient cash to cover its fixed expenses and pay out dividend.

Bulls Say’s

  • SL Green’s midtown focus allows it to access one of the most vibrant business districts in the world. In addition to this, the company’s high-quality office buildings with good amenities should benefit from the flight to quality trend. 
  • The development pipeline of the company is poised to drive significant net operating income growth for SL Green. 
  • SL Green attracts the highest-quality tenants with the deepest pockets, greatly reducing risk across its portfolio.

Company Profile 

SL Green is one of the largest Manhattan property owner and landlord, with interest in around 35 million square feet of wholly owned and joint venture office space. The company has additional property exposure through its limited portfolio of well-located retail space. It operates as a real estate investment trust 

(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

With most fixed income trading still primarily voice based, MarketAxess has a long runway for growth ahead of it

Business Strategy and Outlook

MarketAxess operates the leading platform for the electronic trading of corporate bonds. While the company is primarily focused on U.S. securities, 30%-40% of its corporate bond trading volume comes from emerging market debt and Eurobonds giving the company a strong international presence. MarketAxess also offers trading in U.S. Treasuries and municipal bonds, bolstering its efforts in these sectors through the acquisitions of LiquidityEdge and MuniBrokers in 2019 and 2021, respectively. That said, corporate bonds are the core of MarketAxess’ business which is likely to remain true, a consequence of the more competitive nature of the treasury trading market and the smaller amount of municipal debt outstanding. 

Fixed-income markets globally are increasingly moving away from voice negotiated trading toward electronic trading platforms as the liquidity and workflow enhancement of these electronic networks promises to lower implicit and explicit trading costs for increasingly expense conscious firms. As MarketAxess rolls out such new features as automated trade execution and expands its Open Trading all-to-all network, the cost and liquidity advantages of electronic trading networks over traditional methods continues to increase. With most fixed income trading still primarily voice based, MarketAxess has a long runway for growth ahead of it. 

While revenue only grew in the low single digits during 2021, results were affected by a normalization from a cyclical high in corporate bond trading volume market wide in 2020. That said, it must be noted that MarketAxess’ competitor, Tradeweb, found a great deal of success in U.S. corporate bond trading in 2021 as its net hedging and portfolio trading protocols resonated with traders. The rival firm gained market share from voice trading while MarketAxess’ position was largely stagnant. MarketAxess has worked to replicate these features but the company’s competitive positioning in the U.S will bear monitoring in 2022, particularly as the smaller Trumid has gained momentum and support recently.

Financial Strength

MarketAxess is in a strong financial position, even after the series of acquisitions it has made in recent years. At the end of December 2021, the company had over $500 million in cash and investment securities, more than double its total cash outlay on acquisitions over the last two and a half years, and no long-term debt outstanding. MarketAxess enjoys wide margins and strong cash flow, given the countercyclical behaviour of its revenue is in an excellent financial position from a cash flow perspective. MarketAxess’ operating model has high upfront costs but lower incremental capital requirements to support growth once the trading platform and its network have been established. The company’s decision to switch to a self-clearing model for its U.S. operations has materially increased the amount of capital required to maintain its business, but with a strong balance sheet and good operating cash flow the company still has plenty of room to finance investment spending and shareholder returns as it sees fit.

Bulls Say’s

  • MarketAxess enjoys a commanding position in the market for electronic trading of credit bonds, particularly in U.S. high yield securities. 
  • MarketAxess is benefiting from a secular transition away from voice negotiated trading toward electronic platforms, creating strong tailwinds for continued revenue growth. 
  • U.S. corporate bond markets are seeing higher turnover rates as automated trading algorithms, like MarketAxess’ AiEX, see more adoption and trading costs decrease. This increases transaction volume industrywide, creating another tailwind for MarketAxess.

Company Profile 

Founded in 2000, MarketAxess is a leading electronic fixed-income trading platform that connects broker/dealers and institutional investors. The company is primarily focused on credit based fixed income securities with its main trading products being U.S. investment-grade and high-yield bonds, Eurobonds, and Emerging Market corporate debt. Recently the company has expanded more aggressively into Treasuries and municipal bonds with the acquisitions of LiquidityEdge and MuniBrokers in 2019 and 2021, respectively. The company also provides pre- and post-trade services with its acquisition of Regulatory Reporting Hub from Deutsche Börse Group in 2020 adding to its product offerings. 

(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
Shares Small Cap

Nanosonics’ Third Quarter Largely Consistent With its Second; Shares appear Modestly Overvalued

Businesswoman pointing at diagram in her hands when explaining marketing trends to her team during online meeting

Business Strategy & Outlook:   

Nanosonics’ trophon solution for high-level disinfection, or HLD, of ultrasound probes has garnered substantial market share, as evidenced by penetration of over 75% in Australia and New Zealand and 40% in North America. The elevated growth over the next three years as Trophon continues to gain share in North America and launch in Japan, but high market penetration may be more challenging to achieve in developing economies, which may not be able to prioritise nuanced disinfection standards. Moreover, the device patent expires in 2025, leading to slower volume growth in the medium term. Nonetheless, Nanosonics has a razor-and-blade business model and the installed trophon base supports an ongoing revenue stream from high margin consumables. In 2021 consumables contributed 63% of group revenue. The consumables revenue stream as more secure as its protected from generic substitution until fiscal 2029, and forecast these sales climbing to over 70% of Trophon revenue over the next 10 years. 

Nanosonics primarily distributes via GE Healthcare, its partner across multiple geographies. Recently Nanosonics established a direct sales team in North America, adding to the operating cost base, however, it is expected to see expanding gross margins from this and increasing revenue contribution from consumables. The estimated consumables to roughly earn a gross margin of 85% and devices 65% by fiscal 2026. Outside of trophon, the company expects to launch a new product in flexible endoscope cleaning in 2023. Previously, management intimated the addressable market to be equivalent to trophon and there is greater awareness of the infection issue this product addresses. The broad assumptions of a similar roll-out pattern to trophon from fiscal 2024 onwards and equivalent margins. This supports the views that consolidated companys EBITDA margins will climb to 35% by fiscal 2031 versus 14% in fiscal 2021. The pipeline product contributes roughly 16% of the fair value.

Financial Strengths:  

Nanosonics is in a net cash position and free cash flow positive. The operating model does not require significant capital investment, with the key investments for growth stemming from ongoing R&D spending, building out a salesforce and working capital. Despite having 60-day terms from distribution partners, the current net investment in working capital runs at approximately 28% of revenue due to high inventory holding levels which average roughly 200 days in stock. The forecasted net investment in working capital to remain in line with historical figures, but note it is possible to elevate in the near term as inventory is built up prior to the new product launch and in the early roll-out phase. The company first posted a profit in fiscal 2016 and is yet to pay a dividend, nor it is expected in the future as it invests in underpenetrated markets and its pipeline product. However, the company has free cash flow positive and they forecast it to convert roughly 72% of net income into free cash flow in a typical year.

Bulls Say: 

  • Nanosonics is the market leader in automated HLD of ultrasound probes with significant further market penetration potential in most regions.
  • Establishing its direct distribution model should increase the gross margins achieved by Nanosonics once it reaches critical mass.
  • The company has reached a pivotal point where higher margin consumables dominate the revenue stream. This revenue stream is also protected by patents and the installed trophon device base.

Company Description:  

Nanosonics is a single-product company and its trophon device provides high-level disinfection, or HLD, of ultrasound probes used in semi-critical procedures. The patented technology uses low temperature sonically activated hydrogen peroxide mist that is suitable for probes sensitive to damage. Automated HLD is increasingly being adopted as the standard of care globally as it is superior in preventing cross-infection across patients. Nanosonics’ revenue is made up of capital sales of trophon units, ongoing consumables sales, and service revenue. At June 2021, there were 26,750 trophon units installed globally. Market penetration rates range from over 75% in Australia and New Zealand, roughly 40% in the United States to low-single-digit penetration in EMEA and elsewhere in Asia-Pacific.

(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

Kilroy Realty Corp: Vacancy rates in Los Angeles and San Francisco office markets were recorded at 20.8% and 21.9% respectively in Q1 2022

Business Strategy and Outlook

Kilroy Realty is a REIT that owns, develops, acquires, and manages premier office, life science, and mixed-use real estate properties in Los Angeles, San Diego, San Francisco Bay Area, Seattle, and Austin. It owns over 115 properties consisting of approximately 15 million square feet. The company has positioned itself to benefit from the burgeoning life sciences sector with material exposure in its current portfolio and future development pipeline. It is also greeted, management’s focus on ESG as it aligns its office portfolio to meet the sustainability requirements of its clients.

Kilroy’s management has been able to successfully time the boom in technological employment occurring in the largest metropolitan areas along the West Coast. The company’s strategy is to achieve long-term sustainable growth by developing and owning the highest quality real estate in technology and life science market clusters. The quality of their portfolio is evident from the fact that its average age is just 11 years compared with 30 years for peers. 

The economic uncertainty emanating from pandemic recovery and the remote work dynamic have together created a challenging environment for office owners. Employees are still hesitant at returning to the office as office utilization remains around 45% of the pre-pandemic level. The vacancy rates in Los Angeles and San Francisco office markets were recorded at 20.8% and 21.9% respectively in Q1 2022. The current vacancy rate in both these cities is substantially higher than the vacancy rates during the height of the global financial crisis. The net absorption rate in West Coast markets remains negative to marginally positive as of Q1 2022 and rental growth figures are disappointing especially given the inflationary environment. Having said this, it can be seen that an increasing number of companies requiring their employees to return to the office. In the long run, it is held that that remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centrepiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.

Financial Strength

Kilroy Realty is in sound financial health. The company’s total debt was $4.1 billion as of the end of the first quarter in 2022, resulting in a debt/EBITDA ratio of 6.6 times. It can be pointed out that the debt/EBITDA ratio should trend lower over the next few years as fundamentals recover and EBITDA sees healthy growth. The weighted average interest rate on the company’s debt was 3.70% and the weighted average maturity period was 7.0 years. The maturity schedule of the company’s debt shows that there are no major debt maturities until the end of 2024 and the maturities are adequately spread. It can also be appreciated that the fact that in an increasing interest rate environment 100% of the company’s debt is fixed-rate debt. It is held that the leverage used by the company to fund its capital structure is appropriate given the high-quality office portfolio. The fixed-charge coverage ratio, which is a ratio of EBITDA divided by all fixed expenses (including interest expenses), was 3.5 times and the interest coverage ratio was 8.4 times as of the end of the first quarter of 2022. As a real estate investment trust, Kilroy Realty is required to pay out at least 90% of its income as dividends to shareholders. The FAD pay-out ratio which is a ratio of dividends to funds available for distribution was reported at 67.0% for the year 2021. This shows that the company is generating sufficient cash to cover its fixed expenses and pay-out dividends. The company is also in a comfortable position with respect to liquidity as it has a robust liquidity position of around $1.4 billion including the cash on the balance sheet and the revolving credit facility. This gives the firm enough flexibility to fund its operations, pay dividends, pursue inorganic growth, and invest in organic development opportunities.

Bulls Say’s

  • Kilroy’s focus on technology and life science market clusters should benefit the firm in the long run as wit is alleged that buoyant growth in these areas. In addition to this, the company’s high-quality office buildings with good amenities should benefit from the flight to quality trend. 
  • Kilroy’s management team has demonstrated that it is able to successfully recycle capital and pursue growth over the past business cycle. 
  • Regulatory barriers to construction in West Coast cities such as Los Angeles and San Francisco mean Kilroy will continue to benefit from muted supply.

Company Profile 

Kilroy Realty is a premier owner and landlord of approximately 15 million square feet of office space across Los Angeles, San Diego, the San Francisco Bay Area, and greater Seattle. The company operates as a real estate investment trust. 

(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

Initiating Coverage of Ballard Power With No Moat and a $7 FVE

Business Strategy and Outlook

Ballard has one of the longest histories in the fuel cell industry, with a particular focus on transportation applications. Currently, the company’s focus is on providing fuel cells into heavy-motive applications: bus, truck, rail, and marine. While each of these markets is still nascent, buses are considered the furthest along in adopting zero-emission technology. Truck is likely next in the adoption curve, with rail and marine longer dated. Given the early stage of fuel cell adoption in these respective markets, Ballard’s focus in the near term is on providing fuel cells for pilot/demonstration-type projects to show proof of concept. Given Ballard’s focus on transportation end markets, the company’s strategy faces risks from battery electric technology. This is particularly acute for the bus and light-duty truck end markets, whereas heavy-duty trucking, rail, and marine are likely to have more difficulty adopting battery electric solutions given the reduction in cargo capacity from large batteries. 

The core of Ballard’s strategy is around continuing to invest in its proton-exchange membrane, or PEM, fuel cells. The company plans to invest in research and development to continue to lower the cost of fuel cells to make the technology more economic. Ballard has a goal to reduce the cost of its fuel cell module from roughly $1,000 per kilowatt today to below $300 per kilowatt by 2030. In contrast to peers, Ballard has maintained a narrow focus around its core PEM fuel cell technology. Many peers have diversified into electrolyzers and / or hydrogen production in recent years. While Ballard has not ruled out an entry into the electrolyzer market, it is unlikely it enters the hydrogen production part of the value chain. Ballard’s geographic emphasis is on North America (mainly California), Europe, and China. The company’s China efforts are largely through its Weichai joint venture, a leading diesel engine manufacturer in China. Ballard views the China market as core to its long-term growth ambitions.

Financial Strength

While Ballard lacks the financial strength of more-established companies, the company’s un-leveraged balance sheet. Ballard and the broader green hydrogen industry are still in their infancies. Ballard has largely been in a research and development phase for much of its history and operating income is projected to turn positive until later this decade. This will result in consistent cash outflows over the coming years, but the company has added to its cash balance in recent years. Ballard’s cash balance was just north of $1 billion as of December 2021. Key uses of cash include working capital, organic growth, and select acquisitions. The largest use of cash in the near term to be increasing operating expenses.

Bulls Say’s

  • Ballard boasts one of the longest histories in fuel cell technology. 
  • Ballard fuel cells have among the highest use in real world applications, providing it a first-mover advantage. 
  • The hydrogen fuel cell market is in its infancy, with robust growth projected.

Company Profile 

Ballard is a world leader in proton exchange membrane fuel cell, power system development, and commercialization. The company’s principal business is the design, development, manufacture, sale and service of PEM fuel cell products for a variety of applications, focusing on power product markets of heavy-duty motive (consisting of bus, truck, rail, and marine applications), material handling, and stationary power generation. Sales are concentrated in the U.S., Europe, and China..

(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

We Maintain Our EUR 17.50 Fair Value Estimate on Possible Takeover Offer From Siemens Energy

Business Strategy & Outlook

Competitive pricing pressure among wind turbine manufacturers and cost inflation have placed a large emphasis on cost-saving programs to increase Siemens Gamesa’s profit margins, which have consistently lagged its closest competitor, Vestas. Following an operating loss in 2020 and 2021, Siemens Gamesa have once again turned to a new CEO (the third in two years) tasked with turning around the onshore equipment business through cost-cutting measures and solving the ramp up challenges of its latest 5.X onshore turbine that have caused project execution delays.

Despite the trend toward decarbonization, profiting from manufacturing turbines has proved difficult due to a combination of both industry and internal challenges. Wind turbines are the largest cost for customers and thus tend to be price sensitive. In the short term, Siemens Gamesa will turn to inflation mechanisms in customer contracts to better manage commodity risk given the significant increase in raw materials such as copper and steel. Longer term, however, an element of product differentiation is required to replicate the returns of other razor/blade models. Cost savings are limited in nature, whereas innovation has largely focused on taller towers and bigger rotors, which competitors subsequently replicate. Shorter innovation cycles can also lead to ramp up challenges as evidenced by Siemens Gamesa’s latest onshore turbine. That said, Siemens Gamesa’s offshore turbine is the most efficient in the market and the challenges in the onshore business have not filtered to their leading position in offshore.

As growth matures for onshore turbines amid regulatory changes, greater reliance is placed on Siemens Gamesa to maintain its leading position in the offshore market, which is expected to double between 2025 and 2030. Rectifying the challenges in the onshore business will be required so that Gamesa can harvest the growth in offshore to invest in product innovation and expanding capacity to satisfy demand. A shift in the product mix toward offshore will improve profitability. Improved operations may pave the way for Siemens Energy to take over the remaining 33% stake in Siemens Gamesa.

Financial Strengths

Siemens Gamesa is in a sound financial position with EUR 207 million of net debt (including lease liabilities) at the end of its 2021 financial year. The company also has access to additional funding of EUR 4.4 billion of which EUR 1.3 billion has been drawn. The Siemens Gamesa’s balance sheet allows the company to navigate the challenges of a new restructuring program and provides a cushion for another year of forecast free cash outflow. Siemens Gamesa’s target net debt/EBITDA ratio is a conservative 1.0 times. Siemens Gamesa has EUR 2.0 billion of cash and equivalents and the option to drawdown on its syndicated loan, which is sufficient to cover short-term debt maturities of EUR 382 million as well a ramp-up in capital expenditures and restructuring-related costs. However, we forecast another year of free cash outflow in fiscal 2022, and with a credit rating only a few notches above investment-grade, this limits the company’s potential to use its balance sheet to perform mergers and acquisitions to help further consolidate the industry and capital return to shareholders.

Bulls Say

  • Siemens Gamesa is well positioned to benefit from the structural trend toward decarbonization through its leading position in offshore turbines and global footprint, as renewables contribute more to the global energy mix.
  • The implementation of inflation mechanisms into contracts will improve the management of commodity risk and help turnaround profitability in the onshore business.
  • The hiring of a new CEO tasked within improving operations from Siemens Energy, which owns 66% of Siemens Gamesa, may pave the way for the parent company to acquire the remaining 33% stake.

Company Description

Siemens Gamesa is a leading manufacturer of onshore and offshore wind turbines. The company is the product of the merger between Siemens Wind Power and Gamesa in 2017. The firm operates in two business segments: wind turbines and services. Siemens Gamesa retained its position as the leading installer of offshore turbines in 2020. Siemens Energy (a recent spinoff from Siemens AG) owns 67% of Siemens Gamesa’s shares. 

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Commodities

Newcrest has strong prospects for growth through the recovery in Lihir production and from recent acquisitions

Business Strategy & Outlook:   

Newcrest is a large, long-life gold miner, long established as a low-cost producer. Expansion of the key Lihir and Cadia Valley operations and the lower Australian dollar saw Newcrest return to the lowest quartile of the cost curve. Reserve life of more than 20 years is one of the longest of the global gold majors, implying better-than-industry-average growth prospects, potential for incremental improvements and options to extend life. Exploration success historically fueled production growth and sound returns, save the 2010 Lihir acquisition, which at the time was a misstep. Management’s subsequent focus on Lihir and Cadia has driven meaningful improvement to production and unit costs of production. Newcrest recently expanded into Canada, purchasing Brucejack to add to its 70% stake in the Red Chris copper-gold mine. It also owns a 32% stake in the high-grade, low-cost Fruta Del Norte gold mine in Ecuador.

Despite the elevated gold price and likely improved returns at both Lihir and Cadia, Newcrest shares trade below our fair value estimate. Newcrest has strong prospects for growth through the recovery in Lihir production and from recent acquisitions such as Brucejack and its 32% stake in the Fruta Del Norte mine. Newcrest is well managed under the leadership of CEO Sandeep Biswas and is likely to remain one of the world’s lowest-cost gold miners while increasing copper production.

Financial Strengths:  

The company’s balance sheet is in reasonable shape. Newcrest ended December 2021 with modest net debt of USD 0.5 billion. The net debt is expected to grow to about USD 1.6 billion as at end fiscal 2022 with the acquisition of Pretium Resources and elevated capital expenditure at Cadia, Lihir and with the development of Havieron and Red Chris. However, despite the increase, the balance sheet is still sound. The net debt/EBITDA is expected to peak at around 0.8 times in fiscal 2022 before declining gradually through the remainder of our forecast period. Newcrest has long-dated corporate bonds totaling USD 1.65 billion. The bonds mature in fiscal 2030, 2042, and 2050 with maturities of USD 650 million, USD 500 million, and USD 500 million, respectively. Newcrest has significant liquidity. As at end of December 2021, the company had USD 1.2 billion of cash and USD 2.0 billion of undrawn debt.

Bulls Say: 

  • The shares are undervalued. Newcrest is well managed and has a suite of low-cost, long-life mines, which  is currently being not recognized by investors. 
  • Gold can provide a hedge to inflation risk and offer some benefit in times of market uncertainty. Gold can gain from continued money printing and/or if there is a flight to safety. 
  • Newcrest owns several world-scale deposits in Cadia, Telfer, Lihir, and Wafi-Golpu. Large deposits typically bring significant exp

Company Description:  

Newcrest is an Australia-based gold and, to a lesser extent, copper miner. Operations are mainly in Australia and Papua New Guinea. The company also owns a 32% stake in the Fruta Del Norte gold mine in Ecuador, while the acquisition of Brucejack in 2022 adds to its 70% stake in the Red Chris mine in Canada. The company is likely to produce around 2 million ounces of gold per year over the next decade, making it one of the larger global gold producers but still only accounting for less than 2% of total supply. Cash costs are below the industry average and amongst the lowest of the global gold miners, underpinned by improvements at Lihir and Cadia. Organic growth options include its Havieron prospect, the Red Chris underground mine, and the high-grade Wafi-Golpu copper-gold prospect in PNG.

(Source: Morningstar)

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