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Dividend Stocks

As a middle of the road business, it is foreseen reinvestment is critical for Aviva

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. It is mainly attributed this 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 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, in experts’ opinion. As a middle of the road business, it is foreseen reinvestment is critical. Two of its three objectives have been achieved in opinion and those are focus and financial strength. However, what is waited for is to see 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 is known, 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

It is anticipated 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 centre. 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. It is alleged the net of these actions should 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. Maurice Tulloch then took over and Amanda Blanc been leader since July 2020. 

(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

Wide-Moat James Hardie’s Fiscal 2022 Largely as Expected; Shares Look Attractive

Business Strategy & Outlook

The supportive of Hardie’s strategy. Hardie’s primary strategic objectives are to expand fibre cement’s share of the U.S. exterior siding market and to shift its sales mix to higher-margin products. The goals are mutually reinforcing and achievable. Hardie has been a key beneficiary of the secular decline of vinyl siding owing to the durability advantages of fibre cement. Hardie estimates vinyl’s share of the U.S. exterior siding market has declined from approximately 40% in 2008 to around 25% in fiscal 2021. This trend to persist with Hardie continuing to be a major beneficiary. The Hardie will be able to leverage its research and development capabilities to penetrate other siding categories such as brick, stone, and stucco. Hardie’s fibre cement product innovations can mimic the appearance of these product categories while being less labor-intensive to install than brick and stone and resolving the performance issues of stucco. Hardie is tailoring its product innovations towards higher margin product categories by focusing on the aesthetic performance of the product, generating an emotional attachment from the consumer, and stimulating less price elastic demand. This strategy is supplemented by Hardie’s marketing campaign which aims to communicate Hardie’s value proposition directly to homeowners. Overall, the Hardie will be successful in continuing to expand fiber cement’s share of the exterior siding market while simultaneously shifting its sales mix towards higher margin products.

The Hardie’s intention to further integrate operations with customers. Customer integration provides the facilitation of knowledge between Hardie and its customers, unlocking working capital benefits and providing opportunities for strategic initiatives. The Hardie’s entrenched customer relationships as a key aspect of the business’ wide economic moat.

Financial Strengths

Hardie declared a final dividend of USD 30 cents per share, taking its fiscal 2022 dividends to USD 70 cents per share. Dividends will be unfranked for Australian taxation purposes. An annual payout ratio of 60% of underlying earnings, the midpoint of Hardie’s 50%-70% targeted payout range.

Hardie runs a conservative balance sheet with leverage— defined as net debt/adjusted EBITDA (excluding the impact of asbestos transactions)—typically within a targeted range of 1-2. Net debt/adjusted EBITDA stood at 0.8 at the end of fiscal 2022. Hardie’s asbestos-related liability—the AICF trust—has a gross carrying value at fiscal 2022 year-end of USD 1.1 billion and remains an overhang. However, payments to fund the liability are capped at 35% of operating cash flow after

adjusting for asbestos liability-related payments. While this reduces cash flows available to shareholders over the medium term, the liability shouldn’t constrain the business’ ability to reinvest within itself.  The liability being extinguished within the next decade, likely by fiscal 2027.

Bulls Say

  • James Hardie is poised to benefit from the secular growth of fibre cement siding at the expense of vinyl, brick, stone, and stucco.
  • James Hardie’s strategy of shifting its sales mix to higher-margin products will expand its EBIT margins and enhance return on invested capital.
  • James Hardie’s wide economic moat should protect its ability to earn above its cost of capital over the economic cycle.

Company Description

James Hardie is a producer of fiber cement construction materials. Hardie predominantly serves the residential construction industry with its flagship fiber cement siding product range. The group’s key segment is North America, where it derives around 70% of group earnings from the sale of fiber cement exterior siding and 10% from the sale of fiber cement interior boards. In 2021, the group acquired Fermacell, an exterior and interior products business headquartered in Germany and with operations throughout Europe.

(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
ETFs ETFs

VanEck Australian Equal Weight ETF – Aims to provide Investment Returns before Fees and Other Costs

Tile letter on red rack in word ETF (abbreviation of Exchange Traded Fund) on wood background

Investment Objective

MVW invests in a diversified portfolio of ASX-listed securities with the aim of providing investment returns before fees and other costs that track the performance of the MVIS Australia Equal Weight Index. The index is a pure-play rules-based index that combines benchmark with blue-chip characteristics by tracking the performance of the largest and most liquid ASX-listed companies across all sectors, including offshore companies which generate at least 50% of their revenues or assets from the Australian market. Companies in the Index are weighted equally.

Portfolio Analysis

Performance 

In the highly concentrated Australian equities market, equally weighting a portfolio delivers investors significantly improved diversification and reduced stock and sector concentration, resulting in superior investment outcomes compared to tracking a market capitalisation weighted index, such as the S&P/ASX 200 Accumulation Index (S&P/ASX 200). There is a large volume of academic and investment industry research that concludes equal weight outperforms market capitalisation for the following reasons:

• it provides exposure away from mega and larger caps to smaller cap with more growth potential; 

• it provides exposure to value stocks; and 

• it is an inherently contra trading strategy involving frequent rebalancing that takes profits from winners and increases exposure to losers to maintain equal weighting. The index MVW tracks, the MVIS Australia Equal Weight Index (MVW Index) has demonstrated long term outperformance compared to the S&P/ASX 200.

About Fund:

The VanEck Australian Equal Weight ETF invests in a diversified portfolio of ASX-listed securities with the aim of providing investment returns (before management costs) that closely track the returns of the MVIS Australia Equal Weight Index. The MVIS Australia Equal Weight Index is a pure-play index that includes the largest and most liquid ASX-listed companies, combining benchmark with blue-chip characteristics, purpose-built to capture the true performance of the Australian equities market, with real diversification across both securities and sectors. Individual Index components are determined using a stringent rules-based methodology focusing on liquidity, with a minimum of 25 holdings, weighted equally. The unique pure-play approach expands local exposure to include offshore companies with a listing in Australia which generate at least 50% of their revenues (or – where applicable – have at least 50% of their assets) in this market. An investment in the ETF carries risks associated with: financial markets generally, individual company management, industry sectors, fund operations and tracking an index.

(Source: https://www.vaneck.com.au/ )

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

Too many fingers in too many pies, reduces Aegon’s focus

Business Strategy and Outlook

Aegon has had its share of problems over the last 13 years, averaging close to 4.4% return on equity over this period. That is well below the 11% cost of capital experts’ assign to the business. These struggles have stretched across capital, solvency, governance, management, and recurring nonrecurring items. Additionally, communication with the investment community was not good. However, it is seen, recent results show a change of direction in terms of strategy. 

Under the new leadership Aegon is focusing on four things to make it a materially better company. First, strengthening the balance sheet; management has already started this. Second, creating a more disciplined management culture with the move to quarterly from semi-annual reporting. This is another change which is welcomed. The charges investors saw in the first half of 2020 already show greater accountability. Third, improving efficiency, and fourth, increasing strategic focus, which is likely to be closely aligned. Management has spoken at length about Aegon’s geographical breadth and this is something which is emphasized to investors that is seen to be managerial distraction. Too many fingers in too many pies reduces Aegon’s focus. The United States and Netherlands have long been key to this business. Discussions on Portugal and Spain and the distribution partnership with Banco Santander lead us to believe these markets will remain core, though it remains preference to see an exit.

Financial Strength

Aegon management is on a debt drive and analysts really like this. Traditionally, Aegon has not been a highly leveraged business, steering into the financial crisis with a debt/asset ratio of well under 2%. During this period, Aegon delivered quite reliable earnings. As the global financial crisis ensued and Aegon took on EUR 3.0 billion of debt from the Dutch government, the company’s woes were exacerbated during the succeeding sovereign debt crisis; management drove a further deterioration of the balance sheet with an aggressive pursuit of joint ventures in Spain. Debt consequently increased to 3.5% of assets and was only marginally tempered until another round of poor transactions when management decided to acquire Mercer’s defined-contribution record-keeping business and a partial acquisition of La Banque Postale asset management. Balance sheet quality was further degraded with the purchase of BlackRock’s defined contribution platform and Cofunds a year later. Debt/assets reached a high of 3.6% of assets and interest payments on this debt reached 35% of earnings before interest. This served as a catalyst for mounting pressure from Dodge & Cox, Aegon’s long-term shareholder. Actions have eminently improved the shape of Aegon’s balance sheet and as at year-end 2021 Aegon reported a 2.6% debt/asset ratio.

Bulls Say’s

  • Aegon has shed peripheral businesses in Central and Eastern Europe. 
  • Debt repayment has been impressive. 
  • The new management team appears to be laying-out a strategy for the business.

Company Profile 

Aegon is a Netherlands-headquartered insurance company with core operations that stretch across the U.S., Netherlands, and United Kingdom. The business also holds peripheral ventures in Spain, Portugal, Brazil, 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 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
Commodities Trading Ideas & Charts

Cronos Projected To Experience 11% Average Annual Volume Growth Based On 10-Year DCF

Business Strategy & Outlook

Cronos Group cultivates and sells cannabis predominantly in Canada and hemp-derived CBD in the U.S. but also participates in the global medical cannabis market. Cronos does not disclose its sales by recreational and medical end-markets. The entire Canadian market is forecasted to grow roughly 20% per year on average over the next decade, driven by the conversion of black-market consumers into the legal market and new cannabis consumers. Cronos is half the size or smaller than the majority of other Canadian licensed producers. This adds to the challenge of reaching profitability given a harder ability to scale overhead expenses. International medical cannabis exports are a small but growing part of Cronos. At present, Cronos exports into Germany, Poland, and Israel. The global market looks lucrative, given higher realized prices and the growing acceptance of cannabis’ medical benefits. Exporters must pass strict regulations to enter markets, protecting early entrants like Cronos. Roughly 20% average annual growth is forecasted over the next decade. Cronos’ U.S. operations largely center on hemp-derived CBD. 

CBD is generally viewed as a less attractive opportunity given the massive amount of competition and low barriers to entry. The company recognized a $236 million impairment in 2021, which confirms this concept. In June 2021, it acquired an option for a 10.5% stake in U.S. multistate operator PharmaCann, giving Cronos THC investment exposure. For THC, the U.S. market remains murky with individual states legalizing recreational or medical cannabis while it remains illegal federally. However, it is expected that federal law will be changed to allow states to decide THC legality within their borders by the end of 2023. Cronos’ strategy is geared for an eventual national distribution model more akin to alcohol and tobacco rather than today’s multi-state operator model. Speculation that national distribution will come anytime soon is met with skepticism, and the dispensary will hold most of the value nevertheless. The PharmaCann option is a good albeit small hedge should this scenario be the case in  the future of the U.S. market.

Financial Strengths

Cronos carries virtually no debt. At the end of its first quarter, the company had only about $9 million in lease obligations compared with a market capitalization of roughly $1.2 billion as of May 2022. Cronos continues to carry roughly $1 billion in cash, including short-term investments, which represents the majority of its current market value. The company continues to generate cash losses, but a $1.8 billion investment from Altria in March 2019 reduced the need for significant capital raises in the future. The company is projected to reach positive free cash flow in 2028 and that the Altria investment will be enough to fund expanded operations to meet surging demand growth in Canada and U.S. CBD. Benefiting its financial health, Cronos has generally relied on equity to fund acquisitions and expansion, with no significant debt raises in its history. The company is expected to rely on equity to fund capital needs, which is typical for growth companies such as Cronos to help alleviate potential pressure on its financial health.

Bulls Say

  • Altria Group’s investment of $1.8 billion provides Cronos with capital and a strategic partner with significant product development, branding, and regulatory experience. If successful, Altria Group may increase its ownership of Cronos or potentially acquire it. 
  • Altria’s distribution network gives Cronos an advantage in the hyper competitive U.S. CBD market and can be leveraged for eventual THC distribution. 
  • Cronos’ option to acquire 10.5% of U.S. multistate operator PharmaCann gives U.S. THC investment exposure and a hedge if the dispensary model persists.

Company Description

Cronos Group, headquartered in Toronto, Canada cultivates and sells medicinal and recreational cannabis through its medicinal brand, Peace Naturals, and its two recreational brands, Cove and Spinach. Although it primarily operates in Canada, Cronos exports medical cannabis to Poland and Germany. In addition, it has entered joint ventures in Israel, Colombia, and Australia to drive further international cultivation and distribution growth. In the U.S. the company directly sells hemp-derived CBD and has an option to acquire 10.5% of U.S. multistate operator PharmaCann.

(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

Admiral’s investments in proprietary tech have created returns that far exceed anything generated by its peers

Business Strategy and Outlook

Admiral is a rare example of an insurance company with a narrow economic moat. Furthermore, Admiral’s persistent competitive advantage is built on its proprietary technology intangible assets. Admiral’s investments in proprietary tech have created returns that far exceed anything generated by peers, and it has done so in a persistent and reliable way. These investments range from information technology hardware to software to data and Admiral’s latest round of investments have gone into probability-based machine learning that has then been built bespoke. This internal development and customisation of technology, to make it proprietary, is the reason behind Admiral’s market-leading profitable growth. Using its technology and data Admiral has been able to select the most profitable risks. And furthermore, it is the latest round of investments into artificial intelligence, Admiral seems well placed to drive improvements in its U.K. motor loss ratio. This is because Admiral has historically looked to select drivers that pay by credit card and one way to utilise probability-based learning is to predict fraudulent claims more accurately. This is done through analysis of interdependence between credit-based data features, which Admiral Loans is only likely to strengthen. 

Admiral has historically underwritten policyholders exhibiting higher risk. In its establishment, younger drivers and drivers based in London were all part of the business’ perimeter of nonstandard risks. On one side, Admiral’s historical preference for younger drivers further places the business at an advantage versus the rest. The live Financial Conduct Authority, or FCA, general insurance pricing rules aim to stamp out the practice of price walking, an activity that has been much more prevalent in older generations. Going further, Admiral’s latest round of investments add to its runway for success. Probability-based machine learning has high application when using inter-related data features to identify lower-risk policyholders within higher-risk datasets. Admiral’s perimeter of insuring urban-based nonstandard risk policyholders plays into this

Financial Strength

Admiral’s float investment strategy focuses on low-risk, low volatility, preservation of capital. Admiral typically does this by investing in government bonds, corporate bonds, private credit, cash and money market instruments. As at end-2021 Admiral held 69.3% of its full investment portfolio, excluding cash, in fixed income and debt securities. This has risen from 60.5% a few years ago. Admiral’s allocation to money market funds stands at 28.4% as at end-2021 and this is an allocation that the business has pared back from 35.9% since the same 2019 time frame. In full-year 2021 Admiral generated a 2.0% investment yield. In future it is anticipated that this will rise to 2.1% over 2022 and climb by 10 basis points on average per year until it reaches a long-term 2.5% rate. Across Admiral’s entire investment portfolio, also in 2022 the business will generate 0.7% of gains, with a 50% harvesting rate. It is forecasted these annualised investment gains will climb over the medium term to a long-term 1.4%. Admiral’s total long-term investment return will therefore settle at around 3.7%. On the surface, leverage appears to be one Admiral’s downsides. For example, up until 2013 the business looks like it performed well, maintaining financial prudence of zero debt level. In 2014 this debt started to rise with the July 2014 issuance of GBP 200 million in subordinated notes. These notes have a July 2024 redemption date and 5.5% fixed interest rate. Since 2017 Admiral’s leverage looks to have climbed but this is ultimately because of the 2017 formation of Admiral Loans. Since it was established, Admiral Loans has issued GBP 446.5 million in loan-backed securities that are backing Admiral’s sale of personal loans. Excluding this GBP 446.5 million as at end-2021, Admiral’s debt as a percentage of equity falls from 47.6% to 15.9%, which shows a much better profile. It is forecasted Admiral will reach around a 47.5% debt-to-equity level

Bulls Say’s

  • Admiral’s U.K. motor returns on new investment far outstrip anything achieved by peers, driven by its proprietary tech. 
  • Admiral still only holds a 15.5% share of the U.K. motor insurance market with a big ensuing industry shakeout. 
  • Admiral has a long runway for growth in U.K. home and international car segments, and significant room for improvement in these loss rates.

Company Profile 

Admiral is a personal lines insurance company that operates predominantly in the U.K. Primarily, the business is a motor insurer with the U.K. motor and international car business accounting for over 95% of Admiral’s gross written premiums. The business also has a nascent but growing U.K. household insurance division. When Admiral started out in 1993 the business was established to sell motor insurance to nonstandard risk policyholders. These nonstandard risks included younger drivers, women drivers, drivers wanting to pay by credit card, and drivers based in London. Over the years Admiral has continued to expand its wheelhouse of nonstandard risk selection.

(Source: MorningStar)

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

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

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

Categories
Dividend Stocks

NAB: The board declared a fully franked interim dividend per share of 73 cents, up 6 cps.

Investment Thesis:

  • NAB is trading on an undemanding valuation, with 1.6x Price to Book (P/B) and dividend yield of 4.8%. 
  • All else being equal, NAB is offering an attractive dividend yield on a 2-yr (5.2%) and 3-Yr (5.6%) view. 
  • Strong oligopoly position in Australia (along with three other major banks in CBA, ANZ, WBC).
  • Strong management team and Board.
  • Macro environment to be both a tailwind and headwind – a rising interest rates environment to be both positive and negative in that while it will enable banks to charge more for loans, it also could result in deterioration in asset quality, slower loan growth, as well as higher inflation and wage growth to be detrimental to costs expense.
  • Well capitalized after the capital raising.
  • Though management is cautioned to expect cost to increase, it is highlighted NAB’s strong franchise model with management capable of improving below a 40% cost to income ratio.
  • Potential pressure on net interest margins as competition intensifies with other major banks. Though these pressures to slightly alleviate as it can move into a higher interest rate environment.
  • Improving return on equity with management proving their abilities in recent times to manage profitability in a low interest rate environment.
  • Strong provisioning coverage.
  • A well-diversified loan book.

Key Risks:

  • Impacts from Covid-19 are more severe than already provisioned for.
  • Low growth environment impacting earnings.
  • Potential cuts or reduction to dividends due to low earnings growth. 
  • Intense competition for loan and deposit growth.
  • Normalizing / increase in bad and doubtful debts or increase in provisioning.
  • Funding pressure for deposits and wholesale funding (increased funding costs).
  • Any legal fees, settlements, loss or penalties associated with ASIC or US-based law suits.

Key Highlights:

  • Statutory net profit of $3,551m, up +10.7%. Cash earnings up +3.7% to $3,480m. Underlying profit of $4,865m was up +6.3%.
  • Net operating income of $8,828, up +4.6%. Revenue increased +4.6%, driven by higher volumes, increased fees and commission income, offset by lower margins. Net Interest Margin (NIM) declined 11 basis points (bps) to 1.63%, (or excluding the impact from and Treasury and higher holdings of liquid assets, NIM declined 3bps), reflecting competitive pressures and mix issues in housing lending, partly offset by lower deposit and funding costs.
  • Operating expenses was up +2.6% at $3,963m (but flat relative to 2H21), driven by additional bankers and resources to support growth, combined with salary increases and investment in technology, partially offset by productivity benefits achieved through simplification and third-party savings, and lower occupancy costs.
  • NAB’s 1H22 credit impairment charges were $2m, compared to a 1H21 write-back of $128m reflecting increased charges for forward looking provisions combined with an underlying write-back. 1H22 charges for forward looking provisions of $67m (includes a $131m top-up to the economic adjustment to reflect increased downside risks such as potential impact of higher inflation and interest rates, partly offset by a net $64m from target sector forward looking adjustments).
  • Common equity tier 1 ratio of 12.48% is 52bps lower than the pcp, as NAB completed a $2.5bn buy-back but remains above the Bank’s targets. Pro forma CET1 ratio of 11.65% includes the estimated impacts of the proposed acquisition of the Citigroup Australian consumer business (~31 bps), further $2.5bn on-market share buy-back (~58bps) and proceeds from the BNZ Life divestment (~6bps).
  • The Board declared a fully franked interim dividend per share of 73 cents, up 6cps. Cash payout ratio of 68.3% was 30bps lower.
  • Business & Private Banking. Cash earnings of $1,429m was up +17.5% driven by strong growth in lending and deposit volumes, broadly stable margins and a rise in fee income, lower credit impairment charges partially offset by higher operating expenses (NAB added further resources to support growth and invested in technology).
  • Personal Banking. Cash earnings of $788 was -8.3% weaker due to lower credit impairment write-backs, reduced revenue given competitive pressures and mix shift in the housing lending portfolio, partially offset by lower operating expenses benefitting from productivity and the sale of the broker aggregation business in 1H21.
  • Corporate & Institutional Banking. Cash earnings of $806 was up +3.1 due to strong growth in lending and deposit volumes, higher Markets and fee income, partially offset by lower credit impairment write-backs and higher operating expenses.
  • New Zealand Banking. Cash earnings of NZ$ 668m was up +8.4% reflecting growth in lending and improved margins, partly offset by higher operating expenses and an increase in credit impairment charges.

Company Description:

National Australia Bank Limited (NAB) is one of Australia’s largest banks, with majority of their financial service businesses operating in Australia and New Zealand. The bank also has a presence in Asia, UK and the US. NAB offers banking services, credit and access card facilities, leasing, housing and general finance, international and investing banking, wealth and funds management, life insurance and custodian, trusts and nominee services.  

(Source: Banyantree)

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

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

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

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

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

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

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

Categories
Technology Stocks

United Rentals Benefits From Strong Rental Equipment Demand, Despite Tight Industry Supplies

Business Strategy & Outlook

The United Rentals will continue to be the top player in the equipment rental industry. As the industry leader, the company provides customers better equipment availability and reliability than smaller players. However, many of the equipment brands found in United Rentals’ product catalog can also be found at other competitors, such as Sunbelt Rentals (owned by Ashtead), Herc, and at thousands of other rental companies across North America.

United Rentals has employed an aggressive mergers and acquisitions strategy, completing hundreds of acquisitions over the past two decades. The company to continue rolling in smaller rental companies onto its rental platform, further expanding its geographical reach and fleet categories.  The equipment rental industry is ripe for consolidation and United Rentals will be a beneficiary, but so too will its competitors. The company will likely be competing with other players looking to build scale. In terms of its branch network, United Rentals operates approximately 1,300 rental locations throughout North America, significantly more than the next-largest player, Sunbelt Rentals, which operates over 900 locations in the region. The company is also increasingly extending into the specialty equipment vertical (28% of sales), which includes trench safety, power and HVAC, and fluid solutions.

Finally, the company has exposure to end markets with near-term, attractive tailwinds. The construction and industrial markets will continue to improve from their pandemic lows. Nonresidential construction spending has been depressed, but this trend will reverse over the next few years as economic growth will spur new project development for industrial, retail, hotel, and office markets. The total addressable market for the equipment rental industry will continue to expand as rental penetration increases. More and more contractors are electing to rent general equipment (aerial lifts, forklifts, generators) that are intermittently used on projects. This allows them to save on project costs.

Financial Strengths

United Rentals maintains a sound balance sheet. Total debt at the end of 2021 stood at $9.7 billion, which equates to a net debt/adjusted EBTIDA ratio of 2.2 times. The company can get its net leverage ratio under 2 times over the forecast. This will largely be not only led by the expectations of increasing rental penetration, but also thanks to improving macroeconomic factors, such as higher construction and industrial spending. These factors to boost United Rentals’ adjusted EBITDA. The company’s solid balance sheet gives management the financial flexibility to continue running its growth-focused capital allocation strategy going forward that mostly favors expanding its equipment fleet, particularly specialty equipment.

 United Rentals can generate solid free cash flow throughout the economic cycle. By the midcycle year, and the company to generate nearly $2.7 billion in free cash flow, supporting its ability to return free cash flow to shareholders. Similar to previous years, the United Rentals’ capital allocation strategy to be heavily focused on building out its equipment fleet and making tuck-in acquisitions. The management will continue to buy back shares, but there is no expected dividend to paid out in the near term. In terms of liquidity, the company can meet its near-term debt obligations given its access to credit facilities, approximately $2.6 billion in 2021. The company’s cash position stood at $144 million, which is lower than some of the other companies under the coverage, but the comfort in United Rentals’ ability to liquidate rental equipment on its balance sheet in the event of an economic downturn. In United Rentals maintains a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say

  • Increased equipment rental penetration in North America could result in more general equipment rentals, driving higher revenue growth for United Rentals.
  • Construction and industrial spending may begin to recover from pandemic lows, creating demand for United Rentals’ products.
  • United Rentals’ growing focus on building up its specialty fleet could lead to higher dollar utilization and increased profitability.

Company Description

United Rentals is the world’s largest equipment rental company, and principally operates in the United States and Canada, where it commands approximately 15% share in a highly fragmented market. It serves three end markets: general industrial, commercial construction, and residential construction. Like its peers, United Rentals historically has provided its customers with equipment that was intermittently used, such as aerial equipment and portable generators. As the company has grown organically and through hundreds of acquisitions since it went public in 1997, its catalog (fleet size of $16 billion) now includes a range of specialty equipment and other items that can be rented for indefinitely long time periods.

(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

Smith & Nephew Seeks to Expand Presence in ASCs; Modestly Lowering Our Fair Value Estimate

Business Strategy & Outlook

Impressive innovation has allowed Smith & Nephew to carve out a slice of the orthopedic, sports medicine, and wound-care markets. Though the company is smaller than the dominant orthopedic competitors, it has punched above its weight in terms of introducing meaningful innovation with its pioneering hip resurfacing implant and knee replacements with Verilast technology, which it contends can last for 30 years. These are significant improvements that exceed the evolutionary innovation typically seen in orthopedics.

Nevertheless, as the competitive set consolidates, Smith & Nephew’s position as a midsize competitor leaves it vulnerable as the hospital customer base seeks to reduce vendors to save costs. The firm’s market share–about 10% of hips and knees–translates into a tenuous position. Share shifts in this market are glacial at best, thanks to significant switching costs, and new technology does not necessarily overcome those switching costs. Smith & Nephew’s strong show of meaningful innovation translated into a mere 200-basis-point gain in share over the past decade. This showdown between technical innovation and the stickiness of surgeon preference underscores how difficult it is to induce practitioners to switch. This dynamic and Smith & Nephew’s smaller user base mean the firm could find itself locked out of more hospitals and healthcare systems in the future.

The firm has been aggressively pivoting to reduce its reliance on large-joint replacement with the acquisition of ArthroCare for its arthroscopy and sports medicine presence, concerted efforts to penetrate emerging markets, and the new additions of Osiris Therapeutics for its regenerative products and Leaf Healthcare’s pressure sore-monitoring system. The jury is still out on whether this is enough to allow Smith & Nephew to compete effectively against competitors that continue to grow larger and remain independent. As the market moves gradually toward more vendor consolidation, Smith & Nephew eventually pair up with a larger rival, such as Stryker or Johnson & Johnson, in order to better compete.

Financial Strengths

Thus far, the little to make us nervous about Smith & Nephew’s financial flexibility. While the firm has periodically made acquisitions, it has also generated enough cash to deleverage in relatively quick fashion. For example, following the acquisitions of Osiris in 2019, debt/EBITDA rose to just over 4 times, but has moderated since then. Smith & Nephew can easily meet its interest obligations many times over. Prior to the pandemic, the firm consistently held net debt/EBITDA around 1 time. As with other med tech firms, Smith & Nephew issued debt in 2020 to enhance its cash cushion in the face of uncertainty. With procedure volume resuming, the firm to end the year with net debt/EBITDA around 2.3 times and for further deleveraging in the ensuing years. This still leaves plenty of flexibility for management to leverage up, if management decides to further round out Smith & Nephew’s portfolio in adjacent areas to its core markets. At this point, the firm can fund ongoing operations and support its intention to make regular share repurchases with its cash flow, but it may use debt financing for more large acquisitions.

Bulls Say

  • Smith & Nephew participates in the fast-growing sports medicine arena thanks to its extensive arthroscopy portfolio.
  • A strong arthroscopy presence in ambulatory surgical centers leaves Smith & Nephew well positioned to expand its large joint footprint in that setting.
  • Smith & Nephew has been building out its presence in emerging markets. Considering the obstacles in developed markets that keep it from transforming into a top-tier player, S&N may enjoy greater upside in developing markets.

Company Description

Smith & Nephew designs, manufactures, and markets orthopedic devices, sports medicine and arthroscopic technologies, and wound-care solutions. Roughly 42% of the U.K.-based firm’s revenue comes from orthopedic products, and another 30% is sports medicine and ENT. The remaining 28% of revenue is from the advanced wound therapy segment. Roughly half of Smith & Nephew’s total revenue comes from the United States, just over 30% is from other developed markets, and emerging markets account for 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.

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

Alibaba Increased Its Share Buyback Program to USD 25 Billion From USD 15 Billion

Business Strategy & Outlook

Alibaba BABA is a Big Data-centric conglomerate, with transaction data from its marketplaces and logistics businesses allowing it to move into omnichannel retail, cloud computing, media and entertainment, and online-to-offline services. A strong network effect allows leading e-commerce players to extend into other growth avenues, and nowhere is that more evident than with Alibaba.

Alibaba’s internet services had annual active consumers of 953 million as of September 2021, versus the 1.2 billion online population in September 2021 per Quest mobile and the 1.4 billion population in China. This provides Alibaba with an unparalleled source of data that it can use to help merchants and consumer brands develop personalized mobile marketing and content strategies to expand their target audiences, increase click-through rates and physical store transactions, and bolster return on investment. Alibaba’s marketplace monetization rates have reduced recently, due to increased compliance of antitrust laws, more competition, and weak consumer sentiment. Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD.

While the Taobao/Tmall marketplaces as Alibaba’s core cash flow drivers, AliCloud and globalization offer long-term potential. While AliCloud will remain in investment mode in the medium term, accelerating revenue per user suggests a migration to value-added content delivery and database services that can drive segment margins higher over time. On globalization, third-party merchants are successfully reaching Lazada’s users across Southeast Asia, something that should continue as the company rolls out incremental personalized mobile marketing and content opportunities. While early, the management’s views about Ele.me offering incremental monetization opportunities from Alibaba’s user base.

Financial Strengths

Alibaba is in sound financial health. As of December 2020, the company had CNY 456 billion in cash and unrestricted short-term investments on its balance sheet against CNY 117 billion in short- and long-term bank borrowing and unsecured senior notes. Although Alibaba remains in investment mode, the strong cash flow profile of its e-commerce marketplaces offers it the financial flexibility to continue investing in technology infrastructure and cloud, research, marketing, and user experience

initiatives through its current balance sheet and strong cash flow profile. Additionally, the company has the capacity to add leverage to its capital structure, which could allow it to take advantage of low borrowing rates to fund growth initiatives, introduce a cash dividend when it sees limited investment opportunities with good returns on investment, or repurchase shares. The company to pursue acquisitions that could further improve its ecosystem, including online-to-offline, physical retail, and increased logistic capacity or capabilities.

Bulls Say

  • Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD.
  • Core annual active users on Alibaba’s China retail marketplaces had a retention rate of over 90% for the year ended September 2021.
  • Alibaba’s core commerce (which includes China marketplace-based businesses and other loss-making businesses) adjusted EBITA margin was 26.2%, higher than JD retail’s 2.3% non-GAAP EBIT margin and PDD’s 15.2% non-GAAP EBIT margin for the September quarter of 2021.

Company Description

Alibaba is the world’s largest online and mobile commerce company as measured by gross merchandise volume (CNY 7.5 trillion for the fiscal year ended March 2021). It operates China’s online marketplaces, including Taobao (consumer-to-consumer) and Tmall (business-to-consumer).

Alibaba’s China commerce retail division accounted for 63% of revenue in the September 2021 quarter. Additional revenue sources include China commerce wholesale (2%), international retail/wholesale marketplaces (5%/2%), cloud computing (10%), digital media and entertainment platforms (4%), Cainiao logistics services (5%), and innovation initiatives/other (1%).

(Source: Morningstar)

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