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Dividend Stocks

JB Hi-Fi Ltd interim dividend of 163cps fully franked representing 65% of NPAT and an Off market Buy-Back

Investment Thesis

  • High quality retailer, however trading on a 2-yr PE-multiple of ~15.2x, much of the benefits appear to be factored in (unless we get an upgrade cycle). 
  • Being a low-cost retailer and able to provide low prices to consumers (JB Hi-Fi & The Good Guys) puts the Company in a good position to compete against rivals (e.g., Amazon). 
  • The acquisition of The Good Guys gives JBH exposure to the bulky goods market.
  • Market leading positions in key customer categories means suppliers ensure their products are available through the JBH network.  
  • Clear value proposition and market positioning (recognized as the value brand). 
  • Growing online sales channel. 
  • Solid management team – new CEO Terry Smart was previously the CEO of JBH (and did a great job and is well regarded) hence we are less concerned about the change in senior management. 

Key Risks

  • Increase in competitive pressures (reported entry of Amazon into the Australian market). 
  • Roll-back of Covid-19 induced sales will likely see the stock de-rate. 
  • Increase in cost of doing business. 
  • Lack of new product releases to drive top line growth.
  • Store roll-out strategy stalls or new stores cannibalise existing stores. 
  • Execution risk – integration risk and synergy benefits from The Good Guys acquisition falling short of targets). 

Off – Market Buy Back

  • Total sales were -1.6% to $4.86bn, but up +21.7% over a two-year period. Online sales were up +62.6% to $1.1bn.
  • EBIT was down -9.1% to $420.5m, but up +59.9% over a two-year period.
  • NPAT declined -9.4% to $287.9m but was up +68.8% over a two-year period. This translated to EPS being down -9.4% to 250.6 cps, but likewise, up +68.8% over a two-year period.
  • The Board declared an interim dividend of 163 cps and capital return of up to $250m to shareholders by way of an off-market buy-back. That is, up to $437m to be returned to shareholders through the interim dividend and the off-market buy-back.
  • The last day shares can be acquired on-market to be eligible to participate in the Buy-Back and to qualify for franking credit entitlements in respect of the Buy-Back consideration is 22 February 2022.
  • The Buy-Back is expected to be completed by 20 April 2022.
  • Eligible shareholders will be able to tender their shares at discounts of 8% to 14% to the market price (which will be calculated as the volume weighted average price of its share price over the five trading days up to and including the closing date of 8 April.

Company Profile 

JB Hi-Fi Ltd (JBH) is a home appliances and consumer electronics retailer in Australia and New Zealand. JBH’s products include consumer electronics (TVs, audio, computers), software (CDs, DVDs, Blu-ray discs and games), home appliances (whitegoods, cooking products & small appliances), telecommunications products and services, musical instruments, and digital video content. JBH holds significant market-share in many of its product categories. The Group’s sales are primarily from its branded retail store network (JB Hi-Fi stores and JB Hi-Fi Home stores) and online. JBH also recently acquired The Good Guys (home appliances/consumer electronics), which has a network of 101 stores across Australia.  

(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.

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Technology Stocks

Amazon.com Inc (AMZN) reported a solid 4Q21 results driven by very strong growth rates in previous quarters

Modern financier with papers sitting in front of computer monitor with chart and graph of sales rate

Investment Thesis:

  • Well positioned as a market leader in e-commerce and cloud computing.
  • Strong operating cash flow profile provides the Company with significant amount of flexibility. 
  • Large base of loyal customers.
  • Strong senior executive team.
  • Entry into new regions (e.g. India) – although this is not without risk.
  • Re-accelerating investment expenditure should be positive for future revenue and earnings growth.

Key Risks:

  • It is a complex business with a lot of moving parts, thus forecasting future earnings can be difficult. 
  • Further de-acceleration in advertising revenue.
  • Increased investments fail to yield adequate returns to justify AMZN’s trading multiples. 
  • Increased e-commerce competition domestically and internationally.
  • Decrease in operating margins of AWS due to increased competition and price cuts.
  • Increased regulatory scrutiny (India being a good example).
  • Increase in overheads like free shipping and higher labor cost leading to margin contraction.  

Key highlights:

  • Relative to the previous corresponding period (pcp), 4Q21 group net sales were up +9% to $137.4bn, driven by AWS (up +40%) and Advertising Services (up +32%).
  • Operating income of $3.5bn was down -49% (due to inflationary pressures and disruptions to operations from Covid-19) and net income increased +99% to $14.3bn, predominantly due to the pre-tax valuation gain of $11.8bn on AMZN’s investment in Rivian Automotive Inc.
  • AWS (Amazon Web Services), with net sales up +40% YoY, had another very strong quarter despite lapping strong growth rates in previous periods (4Q20 was up +28%).
  • AMZN will increase the price of Prime in the U.S. in 1Q22, but at this stage has no plans to raise rates in any other region.
  • AWS is currently available in 25 regions globally, with management looking to launch in 8 more regions in the next few years.
  • Management provided good colour around staffing challenges on the analysts briefing and believe they may be through the peak of it.

Company Description: 

Amazon.com Inc. (AMZN) is a multinational technology company focusing in e-commerce, cloud computing and artificial intelligence. It is the largest e-commerce marketplace and cloud computing platform in the world as measured by revenue and market capitalization. The company operates through three segments; North America, International and Amazon Web Services (AWS).

(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.

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Dividend Stocks Expert Insights

Raytheon Technologies Giving Composed Acquaintance to Commercial Aerospace and Defense

Business Strategy and Outlook

Raytheon Technologies is composed of United Technologies’ aerospace businesses and legacy Raytheon, each of which is a powerhouse in the commercial aerospace supply chain and defense prime contracting industries, respectively. The combined entity is fundamentally unique due to its relatively even balance between commercial aerospace and defense prime contracting; most other entities in the industry are heavily skewed one way or the other. 

In commercial aerospace, Pratt and Whitney, Raytheon’s jet engine manufacturer, is amid a large ramp up for the Geared Turbofan engine to support its placement on the popular A320neo family of aircraft. Engines are a razor-and-blade business, with the razor being the original component sale and the blade being servicing. Pratt has narrow-body exposure A320s through the V2500 engine and to the A320neo and the A220 via the GTF engine. While it is somewhat concerning, that some older A320s will be retired during the pandemic, it is viewed  long-term tailwinds for the GTF. Collins Aerospace is one of the largest diversified commercial component suppliers, and it is held, that the segment’s substantial scale and scope give it negotiating leverage with the aircraft manufacturers, as they can choose to not put in a bid on critical components of new aircraft. 

Within defense, Raytheon is exposed to missiles, missile defense systems, space militarization, and IT services for the government. It is anticipated that the military’s increased focus on defending against great powers conflict will drive material investment in each of these exposures, excluding government IT services. The fiscal stimulus used to support the U.S. economy during the COVID-19 pandemic dramatically increased the U.S. debt and higher debt levels are usually a forward indicator of fiscal austerity. It is likely a flattening, rather than declining, budgetary environment as it is held that heightened geopolitical tensions between great powers are likely to buoy spending despite the debt burden. It is likely that contractors can continue growing despite a slowing macro environment due to sizable backlogs and the national defense strategy’s increased focus on modernization.

Financial Strength

Raytheon Technologies is materially deleveraging from the spin-offs of Otis Elevators and Carrier, as well as merging in an all-equity transaction with a much less leveraged Raytheon. It was historically seen that United Technologies carried too much debt from the Rockwell Collins acquisition, roughly three and a half turns of gross debt/EBITDA in 2019 but were confident in the firm’s financial health due to long-term revenue visibility stemming from the large backlogs at the aircraft manufacturers. As it stands today, Analysts’ are more confident in the firm’s capacity to service its relatively smaller debt burden because it will be taking on an ultra-long cycle defense prime contracting business, which has decades of revenue visibility and regulated margins, so Analysts’ are confident in Raytheon Technologies’ ability to service the debt load, the underfunded pension, and the dividend. Analysts’ estimate the firm will end 2022 with gross debt at about 2.7 times EBITDA, it is awaited that the company will continue to deleverage for the time being, so that the company would be positioned to potentially re-lever for an acquisition a few years down the road. Given that the substantial consolidation that has already occurred in the defense prime contracting industry makes it difficult to find potential hardware contractors to acquire and there has always been a lack of potential targets for Pratt & Whitney, it is held that Raytheon Technologies would acquire one of the many component manufacturers in the aerospace supply chain to Collins Aerospace.

Bulls Say’s

  • Pratt & Whitney’s placement on the A320 family and A220 aircraft should substantially increase the company’s installed base of engines, which would unlock decades of high-margin servicing revenue. 
  • The firm’s missile and missile defense segment produces products that are prioritized by the National Defense Strategy, which should lead to consistent growth. 
  • Raytheon Technologies is well balanced between commercial aerospace and defense, which would partially insulate the combined firm from a downturn in either segment.

Company Profile 

Raytheon Technologies is a diversified aerospace and defense industrial company formed from the merger of United Technologies and Raytheon, with roughly equal exposure as a supplier to the commercial aerospace manufactures and to the defense market as a prime and subprime contractor. The company operates in four segments: Pratt & Whitney, an engine manufacturer, Collins Aerospace, which is a diversified aerospace supplier, and intelligence, space and airborne systems, a mix between a sensors business and a government IT contractor, and integrated defense and missile systems, a defense prime contractor focusing on missiles and missile defense hardware. 

(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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Technology Stocks

AMD Completes Acquisition of Xilinx; Firm’s Narrow Moat Is Strengthened With FPGA Leader

Business Strategy and Outlook

Advanced Micro Devices designs an array of chips for various computing applications. AMD operates in the x86-based duopoly with Intel that dominates the PC and server CPU markets. Morningstar analysts think AMD benefits from intangible assets related to its x86 instruction set architecture license and chip design expertise, which gives analyst confidence that the firm will generate excess returns over the cost of capital over the next decade and thus warrants a narrow economic moat rating.

Morningstar analysts thinks the firm is well positioned to enjoy data center growth driven by the shift from on-premise to cloud computing. In the mature PC market, Morningstar analysts think AMD will also gain share at Intel’s expense in the coming years. One potent risk for both AMD and Intel is the shift to ARM-based CPUs in both PCs and servers, though analysts expect x86-based chips to remain dominant for the foreseeable future. AMD has focused on utilizing its CPU and GPU technology in semicustom processor applications, such as game consoles. AMD’s semicustom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles. AMD also competes against Nvidia in the discrete GPU market, though Morningstar analysts don’t believe AMD is as competitive in GPUs as it is in CPUs.

AMD Completes Acquisition of Xilinx; Firm’s Narrow Moat Is Strengthened With FPGA Leader

In February 2022, AMD acquired Xilinx to bolster its product portfolio and better diversify its revenue. Xilinx is the leader in the field-programmable gate array niche of the chip industry. Consequently, Morningstar analyst are raising its fair value estimate for AMD to $130 per share from $128. The updated fair value reflects the combined entity .Management expects annualized cost synergies of $300 million within 18 months, based on synergies in cost of goods sold and shared infrastructure through streamlining common areas. Morningstar analysts assume the joint firm will enjoy better cost economics at TSMC, with both standalone AMD and Xilinx being prominent customers of the foundry leader. 

Financial Strength 

At the end of June 2021, the firm reported $2.6 billion in cash and cash equivalents against $313 million in long-term debt. The firm has been doing a nice job of paying down debt in recent years to create a more resilient capital structure. While the firm has generated solid cash flow in recent years, the company’s longer-term competitiveness remains heavily dependent on the ability of AMD to retain healthy market share across PC, server, and GPU segments.

Bulls Say

  • AMD’s recent CPU and GPU offerings have been more competitive with Intel and Nvidia’s products, respectively, and utilize TSMC’s leading-edge process technologies. 
  • AMD’s GPUs are highly sought after in cryptocurrency mining. Should blockchain technology take off, AMD could be well positioned to take advantage. 
  • AMD has its sights set on Intel’s dominant server CPU market share, and its EPYC server chips have proved to be comparable or even superior to certain Intel chips in many benchmark tests.

Company Profile

Advanced Micro Devices designs microprocessors for the computer and consumer electronics industries. The majority of the firm’s sales are in the personal computer and data center markets via CPUs and GPUs. Additionally, the firm supplies the chips found in prominent game consoles such as the Sony PlayStation and Microsoft Xbox. AMD acquired graphics processor and chipset maker ATI in 2006 in an effort to improve its positioning in the PC food chain. In 2009, the firm spun out its manufacturing operations to form the foundry GlobalFoundries. In 2022, the firm acquired FPGA-leader Xilinx to diversify its business and augment its opportunities in key end markets such as the data center.

 (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

AMP focused on simplifying its business and reducing cost, with less emphasis on growth

Business Strategy and Outlook

AMP plans to simplify Australian Wealth Management, or AWM. It is focused on retaining larger, more profitable practices; so it can minimise compliance costs and regulatory breaches. Tighter compliance and education requirements are being enforced. The firm aims to retain its share of advisers through offering superior adviser support services, and aims to increase distribution via external advisers. Its extensive product suite will be reduced and made more cost-competitive to help attract future fund flows. AMP Bank has been merged with AWM as part of the group’s restructure.

Management intends to demerge, simplify and list AMP Capital’s unlisted real estate and infrastructure business. The directly-managed component of its listed investments business, known as Global Equities and Fixed Income, or GEFI, will be sold to Macquarie. The unlisted infrastructure debt business has also been sold to Ares. AMP’s immediate earnings outlook is subdued. Ongoing negative connotations to the AMP brand and higher education standards will prompt more advisers to leave AWM and deter prospective joiners into the AMP network–thus narrowing its distribution reach.

Financial Strength

AMP’s financial position is sound. AMP has consistently maintained a capital buffer above minimum regulatory requirements, or MRR, to help manage any unwelcome surprises in costs and navigate through periods of fluctuating earnings. AMP’s eligible capital resources as at Dec. 31, 2021, exceeds MRR and its internal target by about AUD 1.2 billion and AUD 383 million, respectively. The eligible capital/MRR ratio over the past five years has averaged 2.2 times. The lowest, however, was in 2021 with 1.9 times. AMP Bank is in sound financial health, with a common equity Tier 1 ratio of 10.4% as at Dec. 31, 2021. Another positive is a progressive increase in the deposit/loan ratio to 81% in December 2021, versus about 63% in 2015. 

The stable capital and funding positions provide comfort that it should be able to manage a potential increase in loan losses. However, there are risks that may impact AMP’s financial health. With ASIC and APRA expected to regulate AMP more aggressively, there is a possibility for further compliance costs, fines, remediation payments or class actions. The high execution risks in implementing its new strategy in the face of ongoing structural changes in the Australian financial advice industry is why there is limited scope for the board to return funds to shareholders in the near term.

Bulls Say’s

  • AMP remains the second-largest adviser network in Australia and can leverage scale to offer its services at a relatively lower cost to customers. 
  • AMP is well positioned to capture inflows from investors, notably the ageing demographic. People tend to seek out financial advice and be more concerned with retirement savings the closer they get to retirement. 
  • AMP should benefit from the progressive increase in the superannuation guarantee contribution rate to 12% by July 1, 2025.

Company Profile 

At its roots, AMP is a wealth manager, providing financial advice via Australia’s second-largest network of aligned financial advisers. It has a vertically integrated business model: AMP advisers can invest client funds into superfunds and non-super investments manufactured by AMP through the firm’s own platforms, though advisers are free to recommend non-AMP products and third-party platforms to their clients. The firm also has a small wealth presence in New Zealand with about 53 advisers. In addition, AMP has an investment management business, servicing both AMP’s adviser clients and external investors (such as institutional clients); and a retail banking business focused on deposit taking and residential mortgages.

(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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Shares Small Cap

BAP Trading on an attractive FY23E PE Multiple of 18.1x and yield at 3.0%

Investment Thesis

  • Trading below our valuation. 
  • Fundamentals for the vehicle aftermarket continue to remain strong (with increase in secondhand vehicle sales; travelers seeking social distancing and hence moving away from public transport; with Covid lockdown measures in forced, more people are spending their holidays domestically utilizing their vehicles).
  • Significant opportunities within BAP to drive growth (expanding network; increase market share by leveraging BAP’s Victorian DC; enhance supply chain efficiencies; driven own brand growth).
  • Strong earnings growth profile. 
  • Further opportunity to grow gross profit margins from better buying terms with tier one and two suppliers. 
  • Significant distribution network across Australia to leverage from.
  • Ongoing bolt on acquisitions and associated synergies.
  • Growing BAP’s own brand strategy, which should be a positive for margins. BAP is on track to reach their 5-year targets to supplement market leading brands with BAP’s own brand products.
  • Weak macro story of leveraged Australian consumer and lower growth environment persisting.
  • Thailand represents a meaningful opportunity in our view. 

Key Risks

  • Rising competitive pressures.
  • Value destructive acquisition. 
  • Rising cost pressures eroding margins (e.g. more brand or marketing investment required due to competitive pressures).
  • Given the high trading multiples the stock trades at, a disappointing earnings update could see the stock price significantly re-rate lower. 
  • Integration (and therefore synergies) of recent acquisitions underperform market expectations. 
  • Execution risk around Thailand. 

Key Highlights

  • The Board declared a fully franked interim dividend of 10cps, up +11.1% over pcp. 
  • The balance sheet remained strong with ample liquidity with cash increasing +101.5% over 2H21 to $79.8m and net debt of $203M (up +23.7% over 2H21) leading to a leverage ratio of 1.0x, providing the Company with significant financial flexibility to be able to respond rapidly to acquisition opportunities and continue to invest in high returning projects. 
  • Management continued investments in locations to support Truckline and Autobarn networks, expanded geographic footprint with BAP now having a presence in over 1,100 locations throughout Australia, New Zealand and Thailand, and signed 2 acquisitions adding annualised revenue of $50m at mid-single digit EBITDA multiples (pre-synergies).
  • The Board 

Company Profile 

Bapcor Ltd is Australasia’s leading provider of aftermarket parts, accessories and services. The core businesses of BAP are: (1) Trade – Burson Auto Parts is a trade focused parts professional supplying workshops with all their parts and accessories. (2) Retail – Autobarn is the premium retailer of auto accessories and Opposite Lock specializes in 4WD accessory specialists. (3) Independents – supporting the independent parts stores via the group’s extensive supply chain capabilities and through brand support. (4) Specialist Wholesaler – the number 1 or 2 industry category specialists in parts supply programs. (5) Services – experts at car servicing through Midas and ABS.

(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.

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Funds Funds

Vanguard Real Estate Index Fund Investor Shares: Low cost, no-frills U.S real estate exposure

Approach

Tracking the MSCI U.S. Investable Market Real Estate 25/50 Index yields a broadly diversified portfolio that captures the full scope of opportunities available to U.S. real estate investors. Market-cap weighting channels the market’s collective wisdom and promotes low turnover, underpinning an Above Average Process Pillar rating. This index selects stocks from the MSCI U.S. Investable Market Index, a broad benchmark the spans the complete U.S. stock market. It adds firms that are classified under the real estate sector. This includes equity REITs as well as real estate management and development firms. The fund excludes mortgage and hybrid REITs, which partially derive their revenue through real estate lending.

Portfolio

REITs represent 96% of this portfolio, with real estate management and development firms rounding out the remainder. REITs are required to distribute at least 90% of their taxable income to shareholders, so this fund consistently generates higher yield than the category average. REITs tend to be more sensitive to interest rates than other equity sectors, partially because interest rates directly affect property values. Additionally, their cash flows from rent collection are relatively fixed, making them somewhat bondlike. REITs’ interest-rate sensitivity depends on their lease durations. For example, office REITs (11% of portfolio) tend to be quite sensitive because of their longer lease cycles, but the shorter leases of residential REITs (14%) make them less responsive. Industrial (11%) and retail REITs (9%) tend to fall in the middle. This fund sprinkles investment across an array of property types, ensuring that its fate isn’t tied to a bet on interest rates or one industry’s performance. 

Performance

Specialty REITs have fared very well over the past few years. REITs that own and operate cell towers, like Crown Castle International CC and American Tower ATC, have turned in especially strong performance. This fund invests in specialty REITs more heavily than the category average, so it has reaped strong growth from these sound performers. Specialty REITs tend to be more volatile than other property types, but they have also demonstrated the potential for stronger returns. 

About the Fund

The investment seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index that measures the performance of publicly traded equity REITs and other real estate-related investments. The advisor attempts to track the index by investing all, or substantially all, of its assets-either directly or indirectly through a wholly owned subsidiary, which is itself a registered investment company-in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. The fund is non-diversified.

(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

Solid Quarter for National Australia Bank With Margin Pressure Offset by Valuable Loan Growth

Business Strategy and Outlook

National Australia Bank is one of four major banks operating in oligopolistic Australia and New Zealand markets. It is Australia’s biggest business bank, offering a full range of banking and financial services to the consumer, small business, and corporate sectors, with significant operations in New Zealand. 

The bank has consistently held onto its large share of business loans, and continued investment shows a clear intention to retain this position. Capacity to make investments into digital onboarding and fast access to unsecured lending ensure the bank retains high satisfaction amongst small business customers.The macro economic impact of the coronavirus has put the near-term outlook for credit growth and profitability under a cloud. The main current influences on earnings growth are modest credit growth, a product of household risk aversion and deleveraging, and delays to business plans for capital expenditure. Intense competition is constraining interest margins. Operating expenses are expected to moderate from 2021 though after years of rising risk and compliance spend.

After enjoying super low impairment charges pre-2020, large loan losses expected due to COVID-19 resulted in large provisions in fiscal 2020. As a result of which, Morningstar analysts expect a return to midcycle levels around 0.18% in fiscal 2025. The MLC wealth divestment completed in May 2021 after reaching an agreement with IOOF for AUD 1.44 billion as the bank simplifies and refocuses on its core banking operations.

Solid Quarter for National Australia Bank With Margin Pressure Offset by Valuable Loan Growth 

National Australia Bank’s first-quarter cash profit of AUD 1.8 billion is a strong start to the year. Operationally performance in the quarter was solid. The bank continues to sustain home loan growth ahead of the market, growing by 2.6% in the quarter. But with net interest margins, or NIM, trending lower, for the earnings run rate to hold, the release of loan loss provisions will need to step up. NIM fell 5 basis points to 1.64%, Morningstar analysts maintained a fair value estimate to AUD 28 per share. Morningstar analysts continue to assume NIM improvements in fiscal 2023 on a higher cash rate with a recovery to a NIM of 1.85% by fiscal 2025. Despite cost inflation, analysts think the bank can keep operating costs flat in dollar terms in fiscal 2023 and expect the benefits of fewer systems, more streamlined loan processing to allow the bank to reduce branch costs and staff numbers over time

Financial Strength 

National Australia Bank is in good financial health, with common equity Tier 1 of 12.4% above the regulator’s 10.5% benchmark as at Dec. 31, 2021. The bank slashed the fiscal 2020 dividend to AUD 60 cents per share on both lower earnings and a reduced dividend payout ratio. Morningstar analysts expect the payout to average 70% of earnings before notable items over the next five years, in line with the target range of 65%-75% introduced in 2020. National Australia Bank has AUD 3.5 billion in excess capital, assuming a target common equity Tier 1 ratio of 11% (management target of 10.75% to 11.25%). This assumes completion of the AUD 2.5 billion share buyback announced in July 2021 and the acquisition of Citigroup’s Australian consumer business.

Bulls Say

  • Management focus is on successful, lower-risk, and profitable domestic banking. Economies of scale, pricing power, a strong balance sheet, and high credit ratings provide a robust platform to drive growth. 
  • As Australia’s biggest business bank, National Australia Bank has the most to gain from the rebound in demand for business credit. 
  • NAB has the ability to achieve significant cost savings and drive operational efficiency improvements

Company Profile

National Australia Bank is the most business-focused of the four major banks, holding the largest share of business loans and the number-three spot in home loans. National Australia Bank is currently the third-largest bank by market capitalization, with the franchise covering consumer, small business, corporate, and institutional sectors. Under the UBank brand the bank also owns one of Australia’s largest digital-only banks. Offshore operations in New Zealand round out the group.

 (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
Dividend Stocks Shares

Dividend of BCE Inc. has been increasing 5% each year since 2015 and is expected to be the norm through 2026

Business Strategy and Outlook

BCE has been investing heavily to upgrade its wireline network by extending fiber to the home, or FTTH, which positions the firm to take share over its footprint. BCE also remains a leader in providing wireless service throughout Canada and has a formidable media business. 

BCE is the biggest Canadian broadband provider, with nearly 4 million high-speed Internet customers at the end of 2021 and a footprint that reaches three fourths of the nation’s population. Its two biggest competitors, cable companies Rogers (in Ontario), and Videotron (in Quebec) have about 2.5 million and 1.8 million subscribers, respectively. As a legacy phone provider, BCE has historically had an inferior network, contributing to better penetration rates for Rogers and Videotron. FTTH will meaningfully reduce operating costs, allow BCE to offer speeds comparable to or better than competitors, and charge higher prices. 

BCE is second to none in Canadian wireless and expects it to remain atop the market with Rogers and Telus. However, it is expected the wireless market to remain competitive and believe pricing will remain under pressure for the incumbents, even if the Shaw merger with Rogers is completed, due to regulatory scrutiny. Long term, average revenue per user will be stagnant, which will limit the firm’s ability to expand wireless margins. 

BCE also distinguishes itself from competitors with a high-quality and diversified media unit (Rogers is the only other Canadian telecom firm with media exposure, and BCE has superior assets). Crave is BCE’s over-the-top video-on-demand service available throughout Canada with a wealth of content, including from HBO, Showtime, and Starz. BCE is also the exclusive provider of HBO Max content in Canada and owns Canada’s top network (CTV) and top sports station (TSN). In total, BCE owns or has exclusive Canadian rights to 30 television channels, over 100 radio stations, an out-of-home advertising business, and broadcast rights for a multitude of sports teams, leagues, and even

Financial Strength

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

Bulls Say’s

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

Company Profile 

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

(Source: Morningstar)

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

Snowflake Inc shifting to subscription model from a usage-based model for boosting its Monetization of products

Business Strategy and Outlook

In the past 10 years, Snowflake has culminated into a force that is far from melting, in our view. As enterprises continue to migrate workloads to the public cloud, significant obstacles have arisen, compromising performance of data queries, creating hefty data transformation costs, and yielding erroneous data. Snowflake seeks to address these issues with its platform, which gives all of its users access to its data lake, warehouse, and marketplace on various public clouds. Snowflake has a massive runway for future growth and should emerge as a data powerhouse in the years ahead. 

Traditionally, data has been recorded in and accessed via databases. Yet, the rise of the public cloud has resulted in an increasing need to access data from different databases in one place. A data warehouse can do this, but still does not meet all public cloud data needs–particularly, in creating artificial intelligence insights. Data lakes solve this problem by storing raw data that is ingested into AI models to create insights. These insights are housed in a data warehouse to be easily queried. Snowflake offers a data lake and warehouse platform, which cuts out significant costs of ownership for enterprises. Even more valuable, in our view, is that Snowflake’s platform is interoperable on numerous public clouds. This allows Snowflake workloads to be performant for its customers without significant effort to convert data lake and warehouse architectures to work on different public clouds. 

The amount of data collected and analytical computations on such data in the cloud will continue to dramatically increase. These trends should increase usage of Snowflake’s platform in the years to come, which will, in turn, strengthen Snowflake’s stickiness and compound the benefits of its network effect. While today Snowflake benefits from being unique in its multicloud platform strategy, it’s possible that new entrants or even public cloud service providers will encroach more on the company’s offerings. Nonetheless, Snowflake is well equipped with a fair head start that will keep the company in best-of-breed territory for the long run.

Financial Strength

Snowflake is financially stable, given the early stages of the company, analyst is confident it will generate positive free cash flow in the long term. Snowflake had cash and cash equivalents of $3.9 billion at the end of fiscal 2021 with zero debt on its balance sheet. Undergoing its IPO in the 2020 calendar year, Snowflake raised over $3 billion from the offering. The cash generated from its IPO will act as ample buffer for Snowflake to keep its cash and cash equivalents positive without taking on debt over the next 10 years. It is forecasted that Snowflake will become free cash flow positive in 2026, after which it is believed, it will continue to invest heavily back in its business rather than distributing dividends or completing major repurchases of its stock. 

Bulls Say’s

  • Snowflake could remain the only multicloud offering of its kind for much longer than anticipated, allowing it to increase its top line more with minimal pricing pressure. 
  • Snowflake could move to a subscription model from a usage-based model, boosting its monetization of its products. 
  • Snowflake could expand to other multicloud data needs, pushing spending per customer to greater heights.

Company Profile 

Founded in 2012, Snowflake is a data lake, warehousing, and sharing company that came public in 2020. To date, the company has over 3,000 customers including nearly 30% of the Fortune 500 as its customers. Snowflake’s data lake stores unstructured and semi structured data that can then be used in analytics to create insights stored in its data warehouse. Snowflake’s data sharing capability allows enterprises to easily buy and ingest data almost instantaneously compared with a traditionally months-long process. Overall, the company is known for the fact that all its data solutions that can be hosted on various public clouds.

(Source: Morningstar)

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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.