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Commodities Trading Ideas & Charts

FVEs Raised for Miners on Higher Commodity Prices Driven by Economic Recovery and Supply Constraints

Business Strategy & Outlook

Oz Minerals is a copper-focused mining company that also produces gold. Both its Prominent Hill and Carrapateena mines in South Australia are in the lowest quartile of the cost curve, and are expanding via a hoisting shaft and block cave mining, respectively. These expansions extend mine lives while increasing planned copper and gold production to around 150,000 tonnes and 190,000 ounces per year, respectively, and keeping each mine in the lowest quartile of the cost curve. The company is advancing various other projects in Brazil to add to its currently-producing Pedra Branca mine, however output is relatively modest. OZ Minerals is also likely to expand into nickel production via

its West Musgrave nickel-copper project in Western Australia. An investment decision on West Musgrave is expected in 2022.

Financial Strengths

Oz Minerals’ balance sheet is strong with net cash of just over AUD 200 million at the end of 2021. The company faces significant capital expenditure on the expansions at Prominent Hill and Carrapateena and the potential development of West Musgrave, which introduces cash

outflow obligations akin to having some financial leverage. However, given the strong outlook for earnings and cash flows, and based on assumed copper and gold prices, the Oz Minerals is able to fund its likely capital expenditure requirements from operating cash flows and modest net debt of less than AUD 1 billion at its peak, expected in 2025. At end 2021, Oz Minerals had an AUD 480 million undrawn corporate facility. The expect peak net debt to correspond with peak capital expenditure on construction of block caving at Carrapateena and on developing the West Musgrave project. Additional growth options include some of the copper/gold assets acquired with Avanco Resources. Given the plethora of internal development options, it seems relatively unlikely Oz Minerals would buy a large operating mine.

Bulls Say

  • Oz Minerals brings leverage to copper, a key metal for the emerging economies of China and India.
  • The Prominent Hill and Carrapateena expansions are set to materially increase copper production in coming years.
  • If developed, West Musgrave provides modest commodity diversification and exposure to battery metals.

Company Description

Oz Minerals is a mid-tier miner that produced 125,000 tonnes of copper and 240,000 ounces of gold in 2021. Production is mainly from the Carrapateena and Prominent Hill mines in South Australia, with Brazil a minor contributor. It is increasing production at its Australian mines while also pursuing

incremental production in Brazil, targeting annual production of 220,000 tons of copper and 400,000 ounces of gold later this decade. Carrapateena and Prominent Hill’s cash costs will likely remain in the lowest quartile of the cost curve once expanded, while the Brazilian operations are smaller

and relatively higher cost. The West Musgrave nickel project in Western Australia is likely to be approved in 2022, which will add an average of 26,000 tons of nickel for its 20-year-plus life. 

(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.

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Commodities Trading Ideas & Charts

Newcrest Instigates Meaningful Improvement to Production With Potential For Growth Prospects

Business Strategy and Outlook

Newcrest Mining is a gold-copper miner with mines in Australia, Papua New Guinea, Canada, and its minority-owned mines in Ecuador. It is estimated that the company will produce more than 1.8 million ounces of gold and around 120,000 tonnes of copper in fiscal 2022, with the acquisition of Brucejack resulting in gold production increasing to average more than 2 million ounces per year for the next decade. Around 80% of its estimated mid cycle revenue is from gold with most of the remainder from copper. Copper’s contribution is likely to rise over time as Newcrest’s various developments commence production.

Newcrest has no moat despite a history of low-cost production, save a cost spike around 2013, and long mine lives. Returns have improved post the expensive acquisition of Lihir, but are likely to remain below the company’s cost of capital for the foreseeable future. Newcrest accounts for less than 2% of global mine production and is a price taker. Gold is increasingly the plaything of investors and subject to swings in sentiment. In 2001, gold consumption for jewellery and technology accounted for 91% of global demand, but in 2021 this had fallen to 50% as a result of increased investor demand and weaker gold consumption. There is also uncertainty around exploration success and the cost to buy or develop new mines, which are an important part of Newcrest’s future value.

Current management was installed in 2014 and brought a focus on cost efficiency, capital discipline and optimisation. Under Sandeep Biswas, Newcrest has been a much more reliable producer and has delivered incremental improvements at its operations, boosting throughput and lowering unit costs, particularly at Lihir and Cadia. Newcrest has a solid exploration record, with successful discoveries expanding reserves at Cadia and Telfer in particular in recent decades. Reserves at the end of 2021 were 54 million ounces of gold and 7.9 million tonnes of copper, representing more than two decades of reserves at current production rates.

Financial Strength

The company’s balance sheet is in reasonable shape. Newcrest ended December 2021 with modest net debt of USD 0.5 billion. Net debt is expected to grow to about USD 1.6 billion 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 considered still sound. Net debt/EBITDA is forecasted to peak at around 0.8 times in fiscal 2022 before declining gradually throughout the remainder of the 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 the end of December 2021, the company had USD 1.2 billion of cash and USD 2.0 billion of undrawn debt.

Bulls Say’s

  • The shares are considered to be undervalued. Newcrest is well managed and has a suite of low-cost, long-life mines, which is not reflected in investor sentiment, as investors have failed to recognise. 
  • 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 exploration upside and expansion options.

Company Profile 

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)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Masco Is Less Cyclical and Interest-Rate Sensitive Than the Market is Giving It Credit For

Business Strategy & Outlook:

Masco’s financial performance over the past eight years has been as much of a self-help story as a story of improving end markets. Masco almost entirely refreshed its senior executive management team in 2014. Since then, it has taken significant measures to build a stronger and more consistent business model. The firm divested its most cyclical and least profitable businesses (it spun off its installation business, now named TopBuild, to shareholders in 2015 and sold its windows and cabinetry businesses in 2019 and 2020, respectively). Management also executed significant cost-reduction initiatives and shored up the firm’s balance sheet. Masco’s sale of its windows and cabinetry businesses was a positive development for the firm because they had long viewed its plumbing and decorative architectural businesses as the firm’s crown jewels and key drivers of the company’s valuation, while Masco’s cabinetry and windows businesses have often been laggards that have been a drag on margins and returns on invested capital.

Repair and remodel spending, and to a much lesser extent, new residential construction, are major drivers of Masco’s financial performance. After divesting its installation, windows, and cabinetry businesses, the firm’s overall exposure to the R&R market is 88% of sales. Over the long term, the repair and remodel market will benefit from several long-term secular tailwinds related to aging housing stock, favorable demographics, increased demand for smart home and energy-efficient products and solutions, and increased spending among minority households. The R&R spending shall grow at about a 5% CAGR through 2030, reaching over a $650 billion addressable market. There is nice growth runway for Masco as the company capitalizes on improving end markets and internal growth initiatives across its remaining plumbing and decorative architectural platforms.

Financial Strengths:

Masco has a sound capital structure, and its consistent free cash flow generation should easily support its debt-service requirements and future capital-allocation decisions. Masco’s balance sheet has improved significantly over the past five years; based on the calculations, net debt/EBITDA peaked at over 4 in 2011 but is now 1.3. Masco plans to maintain a similar leverage ratio to support an investment-grade debt rating. Masco has approximately $3 billion of outstanding debt with maturities staggered through 2051, but the next maturity isn’t until 2028 when $600 million is due.  Masco has ample liquidity, with over $900 million of cash on hand and no outstanding borrowings on a $1 billion credit facility. By the calculations, 2021 marked the 31st consecutive year Masco has generated positive free cash flow since financials were publicly available via the Securities and Exchange Commission website (1991). The company’s ability to generate consistent free cash flow, even in a downturn, demonstrates the durability of Masco’s business model.

Bulls Say:

  • The R&R market is poised for long-term growth, driven by several secular tailwinds, including the aging housing stock and favorable demographics.
  • Masco has well-articulated growth plans for its plumbing and decorative architectural segments. These strategies could drive meaningful top-line growth over the next several years. Furthermore, cost- reduction initiatives have improved profitability.
  • Masco’s brand portfolio enjoys pricing power, which supports margin stability.

Company Description:

Masco is a global leader in home improvement and building products. The company’s $5.1 billion plumbing segment, led by the Delta and Hansgrohe brands, sells faucets, showerheads, and other related plumbing components. The $3.2 billion decorative architectural segment primarily sells paints and other coatings under the Behr and Kilz brands.

(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.

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Dividend Stocks

Medibank Expected To Protect High Returns on Equity Rather Than Chase Growth

Business Strategy and Outlook

Medibank is Australia’s largest private health insurer operating under the Medibank and ahm brands. The dual brand strategy has successfully allowed the group to offer differentiated pricing and messaging to grow members and profits. Despite the “free” universal public system in Australia, around 45% of Australia’s population have private hospital cover due to taxation benefits and penalties, shorter wait times, and a choice of doctor and hospital. Government policy settings are expected, which promote the take up and retention of private health insurance products, to remain in place. With an ageing population, higher demand for more intense healthcare will further pressure the public health system.

It is believed that Medibank’s current strategy, which has seen growth in policyholder numbers and margins, should see the positive trends continue. Initiatives included increasing the number of service providers where individuals pay no-gap, introducing reward programs (such as discounts) for members, investing in the digital offering to make claim lodgment easier, adding tools and resources such as 24/7 nurse teleservice, and a new focus on in-home care. To help support margins there has also been a renewed focus on claim costs. Medibank secured audit rights with hospitals which allows the insurer to investigate where rehabilitation referrals of a hospital exceed industry averages and expanded efforts to identify errors in claims made by hospitals.

Despite larger players generating respectable return on equity on mid-single-digit profit margins, smaller providers have less capacity to absorb the expected claims inflation. This could eventually lead to industry consolidation, or at the least a pull-back in marketing expenses and policyholder acquisition costs. Medibank’s Other Health Services division provides in-home healthcare services such as nursing, rehabilitation, and health coaching for corporates. Medibank health also includes the sales of travel, life, and pet insurance, where Medibank is not the underwriter but is paid a commission.

Financial Strength

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

Bulls Say’s

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

Company Profile 

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

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Reels is now FB’s fastest growing content format by far and the biggest contributor to engagement growth on Instagram

Investment Thesis:

  • Strong market position in online advertising.  
  • Value accretive acquisitions in existing and new growth areas.
  • Focus on innovation across advertising businesses, which should help to sustain growth. 
  • Strong and competent management team.   
  • Strong balance sheet (net cash position) giving flexibility to invest in growth options or undertake capital management initiatives. 
  • Social media dominance with brands like WhatsApp, Instagram and Facebook.
  • Potential earnings upside from rolling out payment solutions and cryptocurrency.

Key Risks:

  • De-rating should growth rates miss expectations.
  • Growing competition from other platforms (e.g., TikTok).
  • Threat of increased regulatory scrutiny, including concerns around consumer privacy and personal data (e.g., AAPL’s new iOS allows users to stop companies from tracking their movements).
  • Deterioration in economic conditions, which would put pressure on the advertising revenue.
  • Competition from companies like Alphabet Inc. and Amazon.com Inc. could put pressure on margins. 
  • Potential return from investment on new, innovative technology fails to yield adequate results.
  • Key man risk if the founder and CEO Mark Zuckerberg decides to depart.

Key Highlights:

  • Total revenue grew +20% (+21% in CC) to $33.7bn, with Family of Apps (Facebook + Instagram + Messenger + WhatsApp + other services) revenue up +20% to $32.8bn (ad revenue growth of +20%/21% in CC to $32.6bn with total number of ad impressions served across services increasing +13% and the average price per ad increasing +6% was partially offset by -8% decline in other revenue to $155m due to a decline in payment revenue earned from games) and Reality Labs (AR & VR related consumer hardware, software and content) revenue up +22% to $877m, driven by strong Quest 2 sales during the holiday season.
  • Cost of revenue increased +22%, driven primarily by Reality Labs hardware costs, core infrastructure investments, and payments to partners. Total expenses were up +38% to $21.1bn with Family of Apps expenses up +35% to $16.9bn and Reality Labs expenses up +48% to $4.2bn.
  • Operating income declined -1% to $12.6bn with margin declining -900bps to 37% as +6.8% increase in Family of Apps operating income to $15.9bn (margin down -589bps to 48.48%) was more than offset by Reality Labs operating loss widening by +57% to $3.3bn.
  • NPAT declined -8% to $10.3bn with EPS down -5% to $3.67, driven by decline in operating income and +32% higher tax.
  • Capex increased +15% to $5.5bn, driven by investments in data centers, servers, network infrastructure and office facilities.
  • FCF increased +36% to $12.6bn driven by +28.9% increase in operating cashflow to $18.1bn.
  • The Company repurchased $19.18bn of our Class A common stock and ended the year with Cash and cash equivalents of $48bn.
  • 1Q22 total revenue of $27-29bn, up +3-11% over pcp, negatively impacted by headwinds to both impression (increased competition + shift of engagement to Reels) and price growth (ad targeting and measurement given Apple’s iOS changes + macroeconomic challenges impacting ad budgets + FX headwind).
  • FY22 total expenses of $90-95bn (vs prior outlook of $91-97bn).
  • FY22 capex (including principal payments on finance leases) of $29-34bn driven by investments in data centres to support AI and Machine Learning.
  • FY22 tax rate to be similar to FY21. 
  • Holding a view that short-form video will be an increasing part of how people consume content moving forward, management continues to replace some time in News Feed and other higher monetizing surfaces to transition services towards short-form video like Reels. (Reels is now FB’s fastest growing content format by far and the biggest contributor to engagement growth on Instagram) and expects pressure on ad impression growth in the near term given Reels monetizes at a lower rate than Feed and Stories, and competition from dominant players like TikTok and YouTube.

Company Description:

Meta Platforms Inc. (NASDAQ: FB) is the biggest social network worldwide focused on building products that enable people to connect and share through mobile devices, personal computers and other surfaces. The Company’s products include Facebook, Instagram, Messenger, WhatsApp and Oculus. The Company also engages in selling advertising placements to marketers, to help them reach people based on a range of factors, including age, gender, location, interests and behaviours. 

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Cadence being market leader in analog EDA tools, with over 80% of the market share for more than two decades

Business Strategy and Outlook

Cadence provides electronic design automation software, intellectual property, and system design and analysis products that are critical to the semiconductor chip design process. It is held Cadence offers a compelling value proposition for investors looking to capitalize on secular trends in technology that are increasing the complexity of chip designs and advancing the digitalization of various end markets. Analysts fair value estimate for Cadence is $138 per share, up from $127 as experts’ model stronger near-term growth and profitability. With shares trading at around $155, It is foreseen the narrow-moat stable-moat-trend company as slightly overvalued. 

It is likely Cadence’s products are transformational in enabling increasingly complex integrated circuit and system-on-chip design. Advancing technologies require these more powerful, precise, and efficient chips, for which EDA software informs the end-to-end process. Cadence is the second-largest EDA vendor, behind Synopsys, having multidecade-spanning market dominance in analog design and emerging as a force in digital design. While it is seen Cadence to grow at a slightly more muted pace than Synopsys, it is likely the firm’s analog stability, focus on profitability, and building of a holistic offering that includes unique system-level solutions as creating a compelling, risk mitigated narrative.

Cadence’s origins rest with analog chip design, which is an inherently stickier market than digital design, where Synopsys had its beginnings. Cadence is the market leader in analog EDA tools, holding over 80% of the market share for more than two decades. Analog chips boast more complex and archaic designs than digital chips, with longer design cycles and more loyal, risk-averse customers. While Synopsys holds a larger piece of the overall EDA market, it is anticipated Cadence’s core EDA segment benefits from a wider moat than Synopsys’ does because of the company’s exposure to analog chip design.

Financial Strength

It is likely Cadence’s narrow moat is derived from high customer switching costs associated with its EDA and system design and analysis businesses, and intangible assets associated with its IP portfolio. In experts’ opinion, this customer stickiness and broad, proprietary IP portfolio will drive excess returns on capital for Cadence over the next 10 years. It is alleged that Cadence’s unified portfolio of EDA tools lends itself to specialized, high-touchpoint, deeply integrated software that is believed to give rise to significant time costs, operational risks, and implementation expenses if it were to be replaced. It anticipated Cadence to grow at an 11% CAGR through 2026, as it is likely an uptick in EDA tool adoption from growing demand for new technologies and rising chip design costs. It is projected the systems business to support growth as well as designs trend from chip-level to board-level and multitier integrated systems become the standard for supporting advanced technologies. It is anticipated the IP business’ profitability focus, expansion of the margin-accretive systems business, and operating leverage to support margin expansion. It is held Cadence to increase non-GAAP operating margin from 35% in fiscal 2021 to 43% in fiscal 2026. In addition to deep integration into design flows, it is likely product familiarity is a defining factor among users of EDA tools that also drives higher switching costs. First, productivity gains from product familiarity drive a faster time-to-market, which is mission-critical in this industry when winning new nodes and designs is largely determined by staying ahead of the semiconductor industry’s pace of innovation. Second, as chip design is an incredibly expensive process, the margin for error is virtually non-existent and engineers are more likely to prefer tools with which they are familiar.

Company Profile 

Cadence Design Systems was founded in 1988 after the merger of ECAD and SDA Systems. Cadence is known as an electronic design automation, or EDA, firm that specializes in developing software, hardware, and intellectual property that automates the design and verification of integrated circuits or larger chip systems. Historically, semiconductor firms have relied on the firm’s tools, but there has been a shift toward other non-traditional “systems” users given the development of the Internet of Things, artificial intelligence, autonomous vehicles, and cloud computing. Cadence is headquartered in Silicon Valley, has approximately 8,100 employees worldwide, and was added to the S&P 500 in late 2017.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

JD’s daily active users’ year-over-year growth of 25% in this quarter surpassed annual active customers’ growth of 21%

Business Strategy and Outlook

JD’s growth in the number of third-party merchants was at the highest level in the last three years, as JD added more new merchants in the quarter than the previous three quarters combined. This will benefit the high-margin marketplace and advertising revenue, though t is held it will be partially offset by reduced fees for merchants amid more intense competition and reduced advertising budgets of merchants amid weaker consumer sentiment. The 98 million increases in annual active customers in the year, who are more likely to come from lower-tier cities, did not reduce average spending per user. Average spending per user was up 4.5% year over year in 2021, reverting from the 3.5% decline in 2020. This is in contrast with Alibaba, whose average spending per user declined by a low-single digit percentage year over year in 2021 due to a higher mix of customers from lower-tier cities. This means that either new users, as a whole, have average spending as high as the old users, or the old users have increased their spending levels to offset dilution from these new users.

JD’s share price has declined due to fears of delisting in the U.S., renewed concerns of a regulatory crackdown and increased common prosperity measures; it is likely such news will continue to weigh on investor sentiment in the near term. Other risks include uncertainty over the losses at the new businesses and whether the lagging impact of real estate weakness on home appliances and electronics will be worse than expected. Improved profitability, improving consumer sentiment in China, the U.S. and Chinese governments resolving the accounting problem, and signs of regulatory relief, will lead to a rerating in expert’s view.

Users’ shopping frequency and the range of categories purchased improved in this quarter. Average spending per user improved by 11% in the quarter for new users. Frequency of shopping by existing customers was up by 3% and average spending per user has increased by 4.5%. Daily active users’ year-over-year growth of 25% in this quarter surpassed annual active customers’ growth of 21%. These demonstrated JD’s stronger user engagement.

Financial Strength

The net product revenue or first-party gross merchandise volume growth estimate for 2022 is 16% now versus 25% previously. It is anticipated gross merchandise volume, or GMV, to grow 18% year over year in 2022, with third-party GMV growth of 19%. The total revenue is now 17% compared with 25% year over year previously in 2022. In 2022, the non-GAAP net margin is 1.9%, versus 1.8% in 2021 as new businesses and logistics improve profitability while JD Retail’s margin remains stable. Marketplace and advertising revenue in 2022 will grow at 20% year over year versus 35% in 2021. It is seen the growth of the home appliance and electronics segment accelerate in the fourth quarter to 21.7% from 18.8% in the third quarter despite macroeconomic uncertainty. This is helped by sales in offline stores in lower-tier cities. JD’s strong relationship with brands in the segment also helped it to secure inventory amid shortages.

Company Profile 

JD.com is China’s second-largest e-commerce company after Alibaba in terms of transaction volume, offering a wide selection of authentic products at competitive prices, with speedy and reliable delivery. The company has built its own nationwide fulfilment infrastructure and last-mile delivery network, staffed by its own employees, which supports both its online direct sales, its online marketplace and omnichannel businesses. JD.com launched its online marketplace business in 2010.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

CrowdStrike Holdings to entrench itself by selling multiple modules over time with its platform-based approach

Business Strategy and Outlook

CrowdStrike is solidly growing its partner revenue stream, which can be critical to keeping the customer addition momentum. ARR from public cloud deployments was $106 million at the end of the fourth quarter, up 20% sequentially. AWS marketplace ARR grew over 100% year over year and CrowdStrike’s MSSP ARR grew by over 200% year over year. While it is withholding these large growth numbers to moderate with scale, it is seen ample growth opportunities as organizations migrate away from legacy endpoint providers and look to managed service partner offerings for protection. Additionally, it is alleged that CrowdStrike’s leading professional services organization is a powerful lead generator. For every $1 spent on professional services, such as resolving organization’s breaches, the company subsequently generates $5.71 in security subscription ARR, up from $5.51 the year prior.

Guidance for the first quarter includes 53% year-over-year sales growth and adjusted earnings of $0.22-$0.24. For fiscal 2023, CrowdStrike is targeting 48% annual revenue growth and adjusted earnings of $1.03-$1.13. It is anticipated that CrowdStrike can overachieve these guideposts behind the strong momentum in core endpoint and adjacent areas, an increased reach due to partner success, and a heightened threat environment creating a powerful demand for upgraded cybersecurity posture.

Analysts have been raising their fair value estimate for narrow-moat CrowdStrike Holdings to $225 per share from $200 after its fourth-quarter results topped analysts lofty revenue growth and earnings expectations, and the company provided robust fiscal 2023 guidance. Even with CrowdStrike shares soaring by 14% in after-hours trading to $193, which is still seen as marginal upside for investors. The increase is spurred from expecting higher growth alongside margin expansion as it is likely for CrowdStrike to gain in an outsize manner from various trends. It is held, CrowdStrike will continue landing customers at a rapid rate as organizations move away from legacy endpoint protection solutions, and then further entrench itself by selling multiple modules over time with its platform-based approach. The company also benefits from a heightened threat environment with a larger attack surface brought up by remote work and organizations using more cloud-based resources, a skills gap within cybersecurity driving demand for CrowdStrike’s managed security, and its professional services being called upon for breach remediation assistance.

Financial Strength

Fourth-quarter sales growth of 63% year over year came from subscriptions increasing by 66% and professional services expanding by 26%. Annualized recurring revenue expanded 65% to $1.73 billion and remaining performance obligations grew 67% to $2.27 billion, both year over year. It is anticipated these robust results show CrowdStrike’s leadership in its core endpoint protection, growth in adjacent areas like IT hygiene and log ingestion, and momentum with partners. CrowdStrike ended the quarter with 16,325 customers, up 65% year over year. Alongside rapid client additions, experts positively view the company being able to keep world-class retention metrics, with dollar based net retention of 124% and gross retention of 98%. Customers buying at least 4 and 6 subscriptions were 69% and 34%, respectively, which is meant to show organizations consolidating spending toward CrowdStrike’s platform

Company Profile

CrowdStrike Holdings provides cybersecurity products and services aimed at protecting organizations from cyberthreats. It offers cloud-delivered protection across endpoints, cloud workloads, identity and data, and threat intelligence, managed security services, IT operations management, threat hunting, identity protection, and log management. CrowdStrike went public in 2019 and serves customers worldwide.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Funds Funds

Realindex Australian Share-Class A: A well versed, Economical Option with Good Background

Approach
Realindex uses a systematic index method employing four equally weighted measures of a company’s economic size to rank and weight stocks in the portfolio. These criteria are adjusted sales, cash flow, and dividends and latest available adjusted book value. Additional earnings quality, near-term value, and debtcoverage filters act to reduce exposure to stocks with greater uncertainty. A signal was also introduced in November 2015 that downweights stocks with negative momentum and overweights stocks with positive momentum. As a part of its endeavor to improve current metrics, Realindex has more recently refined the book value metric to factor in intangibles as well by adjusting it with capitalize R&D and marketing expenses. The filters have contributed to a value bias and tilt to established companies that typically trade at a discount. This alternative approach to traditional index investing aims to eliminate the relationship between portfolio weighting and over/undervaluation associated with weighting a portfolio by market cap. The portfolio is rebalanced quarterly, resulting in average annual turnover of about 15%. The team handles all aspects of research, portfolio management, implementation, and execution with a focus on minimizing trading costs and market impact.


Portfolio
Realindex constructs a diversified, value-leaning portfolio. The strategy’s factors and price filters can lead to some differences relative to the more commonly used S&P/ASX 200 Accumulation Index. For example, the portfolio typically has lower price/book ratios and higher dividend yields. Realindex’s absolute weighting to most sectors remains relatively stable because the fundamental size characteristics tend not to fluctuate wildly unlike the sector weights fluctuation in market-cap benchmarks. Other deviations have been a historic tilt away from healthcare and real estate. Relative to the category index, S&P/ASX 200 Index, the strategy is value-focused and yield-oriented. Large-cap bias is apparent in the portfolio, but it is relative to the category average. As of November 2021, the portfolio was overweight in financial services and underweight in resources and healthcare. Realindex’s portfolio, traditionally, has remained quite similar to market-cap benchmarks overall. Historically, active share has hovered around 20%.

People
Realindex has been through a significant phase of transition in the past couple of years bought about by the end of the partnership with RAFI and the exit of a few senior portfolio managers. This has provided an opportunity for Realindex to revamp its overall team structure and bring on experienced investment professionals. The experienced David Walsh has joined as the head of investment, leading portfolio management and research, which Scott Hamilton leads. With the hires of Joana Nash and Ron Guido as experienced senior quant portfolio managers, Realindex has also beefed up its quant research capabilities.
The team is nimbler now for prioritization and effective collaboration on research initiatives and efficient implementation of the research outcomes, although it is preferred to have clearer lines between the research and portfolio management teams. The visible progress made in the trailing 18 months in research projects (for example, ESG factor impact on price and incorporating intangibles into the book value) augmenting the investment process through the implementation of novel signals is testimony of the team’s collective ability. The recent departure of experienced senior portfolio manager Raelene De Souza is unfortunate. Historically, Realindex has been successful in attracting top investment talent. But the length of their association with the firm has been shorter than it is prefered.


Performance
Realindex Australian Shares has delivered impressive peer-relative performance from inception through February 2022. Its five-year return of 8.5% per year as of February 2022 has easily outpaced the category average but only matched the broader market’s index return, indicating the tough environment it has been for value managers. This performance is principally attributed to the overweighting in materials, underweighting in healthcare, and energy. Better stock inclusion from the resources and consumer cyclical sectors has been additive too. Specifically, overweightings in BHP Group and Wesfarmers has added to performance and offset marginally by the overweighting in Westpac Banking. Amid the pandemic-induced uncertainties across the market, the strategy was admirably more resilient than the average category manager. The impressive outperformance was largely fueled by the strategy’s overweighting in materials, consumer cyclical, and consumer staples (a recurring theme across short- and long-term performance), although slightly offset by its overweighting in financial services. Over the trailing year through February 2022, the strategy has outperformed the S&P/ASX 200 Index but marginally stayed below the category average as value stocks have staged a reversal.

About Fund:
Realindex forms a universe of Australian companies based on accounting measures.Factors such as quality, near – term value and momentum are applied to form a final portfolio of companies. The resulting portfolio has a value tilt relative to the benchmark and provides the benefits of being lower in cost, lower turnover and highly diversified compared to traditional active investment strategies. Realindex overhauled its investment team with an aim to create a nimbler team structure and has hired investment professionals with a high skillset and experience level. The new team has made real progress in the trailing 18 months defining the research agenda and prioritizing projects in terms of their potential to value add. These developments paint a positive picture for the strategy; however, investors should note that the team’s tenure is short and Realindex’s track record in team turnover has not been impressive. As such, it is alleged for the investment team to exhibit longevity before experts’ conviction level is strengthened.

(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Fixed Income Fixed Income

Cheap passive exposure to Australian fixed income

Approach

This strategy aims to track the Bloomberg Ausbond Composite 0+ Index with a tracking error of 0.05% per year or less (before fees). IShares is typically able to achieve full replication of the government-bond component in the portfolio because of ample liquidity and breadth. To alleviate liquidity challenges, the firm uses stratified sampling to acquire corporate and supranational exposures–an industry-standard approach, but one in which iShares excels thanks to its sophisticated global trading systems and experienced team. When the team can’t buy all the bonds in the index at a reasonable price, it will instead buy a basket of bonds that has similar credit and duration risks within allowable tolerance ranges. The team also employs strategies like securities lending to generate additional returns, helping to offset the performance drag from factors like fees and trading costs. IShares’ scale further minimises trading costs; a large active book and the firm’s ETF business allow for cross-trades and wide broker access. IShares thus executes trades cheaply, which is crucial in index fund management. It’s worth noting that Bloomberg’s index assumes distributions earn no interest, whereas iShares may accrue interest on its distribution cash balances. This may cause some tracking error, but ultimately it is a positive tailwind.

Portfolio

This strategy aims to fully replicate the Bloomberg AusBond Composite 0+ Index. Factoring cost, liquidity, and existing diversification if it doesn’t make sense to own all the bonds on issue, it will use stratified sampling to buy a basket of bonds with similar credit and duration risks. As of 28 Feb 2022, the index was composed of government and semigovernment bonds (85%), supranationals (5%), and corporate bonds (9%). The fund invests in high-quality bonds, with AAA rated debt constituting 71% of the benchmark’s quality exposure. Banks and other financials issue most of the credit in the index. The fund’s duration continues to increase with the benchmark as yields mostly hovered around historic lows barring the recent spike, up from 4.95 years at October 2016 to 5.8 years at 28 Feb 2022. The lengthening duration is a result of Commonwealth Government Bonds being issued at longer tenures, such as 30 years. But it means the fund faces the risk of rising yields globally, when we would expect active managers in this space to outperform their long-duration passive peers. Overall credit quality and appropriate diversification make this strategy an appropriate core exposure.

Performance: In terms of Annualised and Cumulative basis

Top 10 Holdings of the fund

About the fund

The fund aims to provide investors with the performance of the Bloomberg Aus Bond Composite 0+ Yr Index SM, before fees and expenses. The index is designed to measure the performance of the Australian bond market and includes investment grade fixed income securities issued by the Australian Treasury, Australian semi-government entities, supranational and sovereign entities and corporate entities.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.