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Technology Stocks

ANN’s operations in 1H22 were adversely impacted by Covid-19 including manufacturing shutdowns

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Investment Thesis:

  • Based on the valuation, ANN’s share price trades at a >10% discount to the DCF valuation.
  • ANN is a quality business with global manufacturing capabilities.
  • In 5-yr forward earnings estimates are on the conservative side and capture the moderating growth likely to be seen from the elevated levels experienced in FY21.
  • FX translation should be positive for the Company.
  • Raw material cost pressures can be shared with customers and suppliers.
  • ANN has a strong balance sheet position with flexibility to return cash to shareholders or borrowing capacity for acquisitions.

Key Risks:

  • Product recall.
  • Trade wars escalate, leading to higher tariffs.
  • Increase in competitive pressures.
  • Adverse movements in AUD/USD.
  • Emerging or developed market growth disappoints.
  • Any worse or better prices for raw materials.

Key Highlights:

  • Capital management. ANN has ample liquidity of ~$550m in cash and committed undrawn bank facilities, and conservative gearing profile (net debt/EBITDA of 1x vs 0.7x in pcp), despite net debt increasing +61.3% over pcp to $382.1m.
  • The Board declared an interim dividend of US 24.25 cps, down -26.9% YoY, representing ~40% payout ratio.
  • Cashflow. The Company delivered operating cash outflow of $22.1m (vs inflow of $12m in pcp) and cash conversion of 59.7% (after adjusting for short term incentives and insurance paid in half but relating to the full year), impacted by lower net receipts due to reduced profitability, higher working capital given lower payables as a result of timing and lower pricing from outsourced suppliers as well as payment of variable employee costs pertaining to FY21.
  • 1H22 results summary. Sales increased +7.6% over pcp (+7.5% organic growth) to $1,009.2m as Healthcare GBU organic growth of +14.8% was partially offset by Industrial GBU organic sales decline of -2.9%.
  • GPADE margins declined -860bps over pcp to 27.3% due to selling of high-cost Exam/SU inventory from outsourced suppliers at lower prices, Covid-19 related manufacturing disruptions and higher freight costs.
  • EBIT declined -24.3% over pcp (-30.6% in CC) to $111m with margin declining -460bps to 11%, with decline in GPADE partially offset by reduced SG&A driven by continued cost discipline and lower variable employee costs.

Company Description:

Ansell Ltd (ANN) operates two global business units: (1) Ansell’s Industrial segment manufactures and markets multi-use protection solutions specific for hand, foot, and body protection, for a wide-range of industries such as automotive, chemical, metal fabrication; (2) Ansell’s Healthcare segment (Medical + Single Use) offers a full range of surgical and examination gloves covering all applications, as well as healthcare safety devices and active infection protection products. The segment also manufactures and markets single use hand protection. Ansell recently sold its Sexual Wellness Global Business Unit group.

(Source: Banyantree)

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

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

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

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

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

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

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

Categories
Technology Stocks

Xero Ltd (XRO) delivered strong top-line growth in FY22 driven by YoY growth

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

Investment Thesis

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

Key Risks

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

Key Highlights: Relative to the pcp and on a constant currency basis: 

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

Company Description

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

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

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

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

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

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

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

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

Categories
Technology Stocks

Elastic’s strong net retention rate—close to 130%—is evidence of the upselling strategy’s success

Business Strategy & Outlook

Elastic’s prospects in the full-stack monitoring, security, and search markets looks positive. The firm’s products benefit from secular tailwinds driving an accelerating increase in data for enterprises to secure, search through, and monitor. The firm’s sticky product portfolio, broad swath of products that enable clients to conduct a variety of mission-critical tasks, and increased penetration in the enterprise market have enabled Elastic to form a narrow economic moat around its business. As the volume of data increases, so does its impact on an enterprise’s decisions. More data brings greater complexity, nefarious activity, and search-oriented use cases. This increase in data, and the corresponding complexity, is driven by an uptick in cloud migrations and digital transformations. These secular trends enable a long runway for growth for Elastic. Elastic’s products are critical for its clients as they allow them to gather insights, detect and triage nefarious activity, and improve their IT stack efficiency. While Elastic is well entrenched in search, full-stack monitoring and analysis and security are the key growth verticals for the firm. Elastic has plenty of greenfield opportunities to exploit in these two verticals in the near to medium term. To this end, the firm has been investing heavily in its sales and research divisions, a strategy that is sound. In addition, with different use cases enabled by its three end markets, Elastic has a big cross-selling opportunity ahead of it.

As Elastic lands and expands its customer base, the benefits of the cross-selling opportunity at play. As a client adopts a multiproduct offering, Elastic’s entrenchment in that client’s ecosystem increases. This entrenchment subsequently results in a higher client lifetime value. The firm’s strong net retention rate—close to 130%—is evidence of the upselling strategy’s success. With the ability to consistently add new customers and subsequently upsell them, Elastic has strong long-term growth prospects.

Financial Strengths

Elastic’s financial position is healthy. Elastic ended fiscal 2022 with more than $860 million in cash and cash equivalents. While the firm has since taken on debt of more than $500 million recently, Elastic’s cash generation over the forecast will far outstrip its commitments over the same period. Elastic is to generate strong free cash flow margins, increasing its operating leverage while driving its top line forward. This trend is typical within the high-growth software space as investments in sales and research in the near term reap rewards in terms of durable cash flows in the later years. There’s no material change in Elastic’s capital structure. The firm is to raise capital by either issuing more equity or taking advantage of low interest rates and issuing debt.

Bulls Say

  • Elastic has strong secular tailwinds as the FSMA and security markets are expected to grow rapidly.
  • Elastic’s multi prong product strategy, including its search, security, and FSMA offerings, can offer different points of entry into potential clients’ IT ecosystems.
  • Elastic is competing in markets that are filled with greenfield opportunities.

Company Description

Elastic is a software company based in Mountain View, California, focusing on search-adjacent products. Its search engine allows it to process both structured and unstructured data while gleaning insights from that data. The firm’s primary focus is on enterprise search, observability, and security.

(Source: Morningstar)

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

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

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

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

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

Categories
Dividend Stocks

Mizuho expanded its overseas business quite rapidly in the first half of the past decade

Business Strategy & Outlook

Mizuho Financial Group is one of Japan’s three largest banking groups, with a 6.9% share of domestic loans and 8.5% share of deposits as of March 2022. In Japan, the environment for banks has been tough for years and to remain so. A long-running deflationary environment in the country led to persistently low demand for loans, with the loan/deposit ratio having declined from 74% in 2000 to around 56% at present. The debt/equity ratio for Japan’s approximately 1 million business corporations declined from more than 2 times prior to the late 1990s to a reasonably healthy 0.66 times in 2019 as borrowers prioritized paying down existing debt rather than taking out new loans for investment, but credit costs may increase moderately in the coming years after many corporations increased their borrowing in 2020 and as the pandemic affected some firms’ business models. Mizuho expanded its overseas business quite rapidly in the first half of the past decade, with overseas loans rising from 12.6% of total loans in March 2011 to 29.4% by March 2016. Mizuho has since moderated the overseas growth in order to better manage risks and conserve capital, and overseas loans comprised 33.8% of total loans as of March 2022. Compared with its Japanese megabank rivals, which have taken control of local banks in the U.S. or Southeast Asia, Mizuho’s only such investment overseas is a 15% stake in Vietnam’s Vietcombank and a 7.5% stake in Vietnamese digital-payment firm M-Service. Almost all of its overseas operations are done through the main Mizuho entities (Mizuho Bank, Mizuho Trust, and Mizuho Securities). Mizuho also lacks the large consumer finance, credit card, and leasing operations of its two rivals, leaving it dependent on banking, securities and asset management alone for future returns. The need for massive expense reductions is thus even more important for Mizuho’s future profitability than it is for its two megabank rivals. However, the lack of existing businesses could ironically help Mizuho adapt more flexibly than its rivals if digitalization increasingly disrupts businesses such as credit card payments.

Financial Strengths

As of September 2022, Mizuho Financial Group’s common equity Tier 1 capital ratio was 11.4%, slightly below the average for global systemically important banks. Mizuho’s density of risk-weighted assets to total assets is also lower than that of many other G-SIBs, particularly those headquartered in the U.S., and its ratio of Tier 1 capital to total leverage exposure of 4.22% is well below the G-SIB average of around 6.0%. This presents a constraint on Mizuho’s ability to increase profits by expanding balance sheet size. Instead, the group has no choice but to improve efficiency with the current size of assets, or preferably with a smaller balance sheet. Mizuho’s liquidity coverage ratio of 126% compares with the G-SIB average of 134%. The LCR does not fully distinguish between currencies, and while Japanese banks’ yen liquidity is very strong, they depend on access to U.S. dollar funding for their large amount of U.S. dollar assets. Foreign-currency deposits of USD 227 billion covered 77% of Mizuho’s nonyen loans of USD 296 billion as of September 2022. For the remainder, Mizuho has issued large bonds in U.S. dollars and euros through the holding company, as well as bonds in CNY and AUD through Mizuho Bank.

Bulls Say

  • Mizuho has outlined aggressive cost-cutting plans that could surprise market expectations to the upside.
  • After years of system troubles and long delays in integrating its predecessor banks, Mizuho has left expectations at such a low level that there is room for upside surprise as long as the group just performs reasonably well.
  • Mizuho’s lack of a strong consumer finance or credit card business could ironically help it adapt more flexibly to disruptive innovation in this area.

Company Description

Mizuho Financial Group is roughly tied with megabank peer Sumitomo Mitsui Financial Group for the status as Japan’s second largest bank after Mitsubishi UFJ Financial Group. As of March 2021, Mizuho’s market share of domestic loans was 6.9%, compared with 7.0% for SMFG and 8.3% for MUFG. In Japan, Mizuho has more of a corporate focus than SMFG, which has a larger retail business. Its overseas weighting is slightly smaller than that of MUFG. Unlike its two Japanese megabank peers that own foreign banks outright or hold non controlling stakes in local banks overseas, Mizuho expanded in recent years beyond its traditional Japanese borrowers, mainly through its core banking and securities units, focusing on the financing needs of global multinational corporations.

(Source: Morningstar)

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

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

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

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

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

Categories
Technology Stocks

Intuit has launched matchmaking systems, for both its small-business and consumer customers

Business Strategy & Outlook

Intuit is the giant behind U.S. small-business accounting software QuickBooks and do-it-yourself U.S. tax software TurboTax. With TurboTax and QuickBooks online sales having eclipsed their respective desktop sales, Intuit has now transitioned into a cloud-first company. Consequently, this has enabled Intuit to leverage customer data to streamline the user experience across disparate products and to natively market its offerings, in turn supporting switching costs and a network effect, which already is the backbones of Intuit’s wide moat. Over the past several years, Intuit has continued to innovate. It has realized the insecurity customers have in accomplishing the consequential tasks of tax filing or business accounting on software alone. In turn, for both its small-business and consumer customers, Intuit has launched matchmaking systems. In accounting, that means matching small businesses with accountants, and in tax, that means adding a human review to the filing process. Both matchmaking mechanisms pose meaningful opportunities ahead, in the form of increased customer retention on both sides and getting exposure to the assisted tax market. Now that Intuit is starting to reap the benefits of playing matchmaker, next up is to take big bets on QuickBooks complements, such as creating an omnichannel sales platform for small businesses. While these buildouts will take time, such direction is a good one to keep propelling the QuickBooks network effect as customers continue to demand all-in-one software to run their businesses.

Intuit’s business is not immune to risk, which lies particularly in IRS tax-filing regulation as well as the risk of new entrants in the small-business accounting space. Still, such risks would only gradually chip away at Intuit’s accounting and tax dominance, given the force of its network effect and its financial health equipping Intuit with the ability to turn the tides.

Financial Strengths

Intuit is in good financial health considering its net cash cushion of $1.8 billion as of fiscal 2021 and debt/EBITDA of 0.7 times as of fiscal 2021. This leaves Intuit able to meet the future capital expenditures, acquisitions, repurchases, and dividends needed to uphold the business and keep shareholders happy. Specifically, capital expenditure is to remain near 1.3% of revenue over the next five years. Additionally, dividends are to increase year to year over the next five years by approximately $0.60 per share per year from 2022 to 2026. The company will continue to make acquisitions, averaging to roughly $100 million per year from fiscal 2023 to fiscal 2026, after $12 billion in acquisitions in fiscal 2022 from purchasing Mailchimp.

Bulls Say

  • Intuit’s tax revenue should climb at a healthy rate as the company’s solutions intersect with the assisted tax-filing base.
  • QuickBooks should continue to see revenue growth from Intuit’s growing ecosystem capabilities.
  • Operating expenses should decrease as a percentage of revenue as the company realizes synergies between links among once disparate offerings and benefits from scale.

Company Description

Intuit is a provider of small-business accounting software (QuickBooks), personal tax solutions (TurboTax), and professional tax offerings (Lacerte). Founded in the mid-1980s, Intuit controls the majority of U.S. market share for small-business accounting and DIY tax-filing software.

(Source: Morningstar)

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

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

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

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

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

Categories
Technology Stocks

Historically, BDX was considered a virtually recession-proof business

Business Strategy & Outlook

After a tumultuous few years, Becton, Dickinson is undergoing course correction. The COVID-19 revenue windfall has been reinvested, which should lift the firm’s core business growth in the upcoming years once the testing revenue fades. The biggest uncertainty remains around the return of BD’s pump infusion system (Alaris) to the market, which could be a material catalyst for the company whenever it occurs. Historically, BD was considered a virtually recession-proof business. The essential nature of many of BD’s medical products had typically shielded the firm from any capital spending-related volatility, and this business continued to fare fine during the COVID-19-induced hospital admission deceleration. However, many of the businesses acquired with Bard have exposed BD to revenue volatility. Combined with the setbacks and revenue deceleration in the peripheral segment, the Bard acquisition has not been a smashing success. With hospital activity returning to more normal levels, there’s a momentum in the surgery segment that came with Bard, and while peripheral is no longer the star of the portfolio, businesses acquired are lifting BD’s growth profile from its historic levels.

Alaris continues to be a headache for BD, and this recall represents a significant blemish on the company’s previously very clean execution track record. The magnitude of the damage to the pump franchise is still not certain, but BD will still end up ceding material market share in this area by the time the pump returns to the market (which could be as far out as 2025). The company needs almost flawless execution in the upcoming years to reverse investors’ growing skepticism regarding its performance.

Financial Strengths

BD’s debt level is manageable after the Embecta spinoff and recent acquisition. The company has recovered its investment-grade rating and generates strong free cash flow to fund its dividend, which is among the largest of its peers. Most of the COVID-19 testing revenue has been reinvested into R&D, which will lead to an improved growth profile going forward.

Bulls Say

  • BD’s surgery business delivered strong performance since the pandemic waned. 
  • BD reinvested its testing windfall into R&D in its key areas, which will likely lead to the elevated growth (relative to its historic levels) going forward. 
  • Embecta spinoff is a positive development for BD in terms of its growth opportunities.

Company Description

Becton, Dickinson is the world’s largest manufacturer and distributor of medical surgical products, such as needles, syringes, and sharps-disposal units. The company also manufactures diagnostic instruments and reagents, as well as flow cytometry and cell imaging systems. BD Interventional (largely the former Bard business) accounts for 23% of revenue. International revenue accounts for 44% of the company’s business.

(Source: Morningstar)

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

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

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

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

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

Categories
Technology Stocks

Vitesco has been winning large amounts of new business due to the industry’s transition to electrified powertrains

Business Strategy & Outlook

Vitesco will capitalize on vehicle electrification arising from global clean air regulation. Vitesco’s products are used in internal combustion engines, hybrid electric, battery electric, and fuel cell electric vehicles. The company’s electrified vehicle powertrain product lines should support revenue growth in the mid-single-digit range, despite non core ICE product lines which are declining. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. Vitesco has been winning large amounts of new business due to the industry’s transition to electrified powertrains. While 2021 electrification sales amounted to EUR 888 million (from more than one operating segment) out of the consolidated total of EUR 8.3 billion, 2021 electrification order intake was EUR 5.1 billion. Vitesco has a cumulative EUR 16.8 billion electrification order intake backlog (EUR 51 billion total order intake backlog). Once an order is taken, development for a vehicle powertrain takes two to four years, during which Vitesco incurs development costs without any associated revenues. The production phase, when revenue is generated, lasts between five-10 years.

Vitesco’s large number of new contracts in development phase, relative to the low number in production, leads to net losses through 2024 and break even in 2025 for the electrification technology operating segment. The segment’s 2025 revenue is EUR 1.95 billion, up from EUR 587 million in 2021. Vitesco to wind down contract manufacturing for its former parent, Continental AG, with revenue dropping from EUR 1.05 billion in 2021 to zero in 2028. Noncore ICE revenue to decline from about EUR 2.0 billion in 2020 to EUR 665 million in 2031. Because of high growth electrified powertrain business, from a 2019 base, 4% average annual consolidated revenue growth during the 10-year, roughly 1-3 percentage points higher than expectations for 1%-3% long-term growth in global light vehicle demand.

Financial Strengths

Vitesco maintains a solid balance sheet and liquidity that, relative to other parts suppliers, makes for strong financial health. Vitesco has ample liquidity and can generate sufficient free cash flow to meet its current financial obligations and weather cyclical downturns. The firm maintains a low level of debt as its net debt / total capital was negative 7.6% (indicating a net cash position) at the end of 2021. The firm has two multicurrency revolving credit facilities including a EUR 750 million core credit facility and an incremental EUR 250 million credit facility. At the end of 2021, Vitesco had EUR 1,614 million in liquidity, including available credit facilities and a EUR 614 million cash balance. Short-term debt was EUR 69.8 million and long-term debt was EUR 199.1 million for a total debt balance of EUR 268.9 million. Vitesco ended 2021 with a 0.3 net adjusted debt/ EBITDAR ratio which takes into consideration cash, operating leases, and rent expense

Bulls Say

  • Global clean air legislation enables Vitesco’s top-line growth to exceed worldwide growth in demand for light vehicles. 
  • The firm’s global manufacturing footprint enables the firm to participate in global vehicle programs and capitalize on global demand. 
  • As automakers consolidate purchases with fewer suppliers, large firms such as Vitesco are in the best position to gain share because they can offer a wide range of products at attractive prices.

Company Description

Vitesco is a global Tier I automotive supplier of internal combustion engine (ICE), hybrid electric (HEV), battery electric (BEV), and fuel cell electric (FCEV) vehicle powertrain components and systems, operating through four segments including electronic controls, sensing & actuation, electrification technology, and contract manufacturing. The company was spun off from Continental AG on Sept. 16, 2021. ICE powertrain products include electronic controls, sensors, actuators, turbochargers, hydraulic components, pumps, and emissions technologies. HEV, BEV, and FCEV products include battery management systems, onboard chargers, battery junction boxes, emotors, inverters, converters, thermal control, electronic control units, pumps, flow control valves, sensors, and actuators.

(Source: Morningstar)

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

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

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

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

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

Categories
Dividend Stocks

As more and more retail transactions go through digital channels and commercial margins improve in PNC’s newer markets

Business Strategy & Outlook

PNC has transformed itself since the financial crisis, with the integration of the troubled National City (doubling the size of PNC), the acquisition of RBC’s U.S. branch network in the Southeast, and the acquisition of BBVA USA (a roughly 25% increase in size). PNC is now the second largest regional bank in the United States. PNC has been successful at organically expanding its customer base, both in commercial banking and in retail. The expanding client base has led to solid loan, deposit, and fee income growth. Selling new products into the formerly underperforming RBC branch network has worked, and PNC now seems poised to repeat this effort with the acquisition of BBVA. The bank’s Midwest commercial growth strategy is paying dividends, and PNC is now attempting retail growth efforts in the same areas where commercial expansion was successful as well as commercial optimization within the BBVA footprint.

The successful acquisition history, seemingly successful expansion initiatives, and improved credit performance during the 2007 downturn lead to believe that PNC is one of the better operators. Overall, the bank is a solid regional banking franchise, with a national presence and scale, retail and commercial offerings, a successful asset management unit, and solid middle market investment banking operations with its Harris Williams unit. PNC has executed on many expense-saving initiatives over the years, and management has been actively reinvesting many of these savings back in the business to stay ahead on the technology front, with multiple bolt on acquisitions already completed and more likely to occur in the future. As more and more retail transactions go through digital channels and commercial margins improve in PNC’s newer markets, improving operating efficiency for the bank.

Financial Strengths

PNC is in good financial health. The bank has weathered multiple energy downturns, the financial crisis, and the pandemic well. Most measures of credit strain remain quite manageable, and the bank’s history of prudent lending gives comfort with the risks here. PNC’s common equity Tier 1 ratio of 9.3% as of September 2022 is more than adequate. The capital-allocation plan remains fairly standard for PNC, although the bank does plan to target a higher dividend payout ratio of closer to 40% or more over time. Otherwise, there is a preference to use extra profits to improve the competitive positioning of the bank through internal investment, with the left overs used for share repurchases.

Bulls Say

  • PNC’s acquisition of BBVA seems likely to add value to the franchise and for shareholders, and will make PNC one of the regional banks with the most scale, and could drive above-market fee growth for several years.
  • A strong economy and higher rates are all positives for the banking sector and should propel results even higher. This is unique for banks, as many sectors don’t benefit from higher rates.
  • In addition to acquisitions, PNC has organic expansion opportunities it is taking advantage of, which could lead to higher organic growth than peers over time.

Company Description

PNC Financial Services Group is a diversified financial services company offering retail banking, corporate and institutional banking, asset management, and residential mortgage banking across the United States.

(Source: Morningstar)

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

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

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

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

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

Categories
Dividend Stocks

WES reported 1H22 results reflecting earnings weaker relative to the pcp, with revenue of 17758m largely flat relative to the pcp

Investment Thesis

  • Ongoing momentum in discretionary spend, driven by strength in housing prices.
  • Diversified asset base with core assets continuing to grow (Bunnings)
  • Expect improved performance from Target and Industrials businesses.
  • On-going focus on shareholder return including attractive yield.
  • Strong management team.
  • Strong balance provides flexibility to take advantage of opportunities as they arise.
  • Potential capital management initiatives.

Key Risks

  • Margin erosion due to competitive pressures.
  • Disappointing earnings performance in Bunnings.
  • Deterioration in the macro picture leading to lower retail sales activity and volumes.
  • Deterioration in balance sheet metrics.
  • Adverse movements in AUD/USD.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • WES’s earnings were weaker relative to the pcp, with revenue of $17,758m largely flat relative to the pcp, but EBIT of $1,905, declined -12.3%, and NPAT of $1,213, was -14.2% weaker, with strong results in WesCEF and Industrial and Safety, up +36.3% and +10.8% respectively, more than offset by poor performance in Kmart and Officeworks, down -63.4% and -18.0% respectively. 
  • Free cash flows of $949m was -51.7% weaker.
  • Net capex increased to $405m, up +66.7%.
  • WES’s balance sheet position deteriorated from the pcp as a result of a $2.3bn return of capital to shareholders in December, with net financial debt/cash reversing from a net cash position of $871m to $2,615m net financial debt position at the end of the half. Debt to EBITDA (excluding significant items) is now 2.0x versus 1.3x in the pcp. 
  • The Board declared an interim dividend of 80cps, fully franked, -9.1% lower than the pcp.

Company Description

Wesfarmers Limited (WES) has diverse business operations covering convenience stores, home improvement, office supplies, and department stores. The company also has an industrials division which includes businesses in chemicals and fertilizers, industrial and safety products and coal. Wesfarmers employs over 220,000 people.

(Source: Banyantree)

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

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

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

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

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

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

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

Categories
Dividend Stocks

Suncorp’s regional banking franchise is more concentrated than the major banks, with home loans making up around 80% of the loan book

Business Strategy & Outlook

Suncorp is a well-capitalized financial services business with a dominant market position in the Australian and New Zealand general insurance industry and a regional banking franchise headquartered in Queensland. In addition to offering insurance under the parent name, key brands in Australia include AAMI, GIO, bingle, Apia, Shannons, and Terri Scheer. In New Zealand, key brands include Vero, AA Insurance, and Asteron Life. At group level, the insurer carries concentrated weather and earthquake risk in Australia and New Zealand, and in particular Queensland which makes up around 25% of gross written premiums in Australia. The group’s exposure to the Queensland market, where large natural peril events have been larger and more frequent, heightens the risks. Reinsurance protection mitigates risks to some extent, but can be expensive, particularly following large events.

Suncorp’s regional banking franchise is more concentrated than the major banks, with home loans making up around 80% of the loan book and Queensland accounts for more than half of total lending. A smaller operating presence, higher funding and operational costs, and relatively limited product offerings have all led to lower margins relative to the majors. A sale of the bank to ANZ Bank would see capital returned to shareholders and is pending regulatory approvals. While there are potential benefits to the bancassurance model, such as better customer insights versus stand-alone insurance peers, and better cross-selling opportunities, they have not delivered a material tangible improvement in earnings, returns, or switching costs. Selling home insurance to borrowers is the lowest hanging fruit, with recent improvements to give the group a single customer view likely to make the process smoother. Similar to its peers, Suncorp is focused on enhancing the digital offering to ensure simpler and faster quotes, claim processing, and to ensure the large insurer remains competitive on price. In response to changes in the way customers engage with their insurer, with less human contact and the expectation of being able to access services at any time, productivity improvements remain a priority.

Financial Strengths

Suncorp Group is in good financial health. As at June 30, 2022, Suncorp Insurance had a prescribed capital amount, or PCA, multiple of 1.77 times the regulatory minimum. The common equity Tier 1 ratio for the insurance business was 1.22 times post the final dividend payment, within the target range of 1.125-1.325 times the PCA, and well above the regulatory minimum of 0.6 times. The bank’s common equity Tier 1 ratio as at June 30, 2022 was 9.1%, within Suncorp’s 9% to 9.5% target range.

Suncorp targets a dividend payout of 60-80% cash earnings (excluding special dividends).

Bulls Say

  • Premium increases stick without an equal rise in claims and rising rates lift yields on fixed income, together lifting underlying profitability and dividends.
  • A benign claims environment with a lower incidence of major catastrophes would considerably boost underwriting profits.
  • Risk management has been improved, and productivity initiatives are expected to deliver greater cost efficiencies.

Company Description

Suncorp is a Queensland-based financial services conglomerate offering retail and business banking, general insurance, superannuation, and investment products in Australia and New Zealand. It also operates a life insurance business in New Zealand. The core businesses include personal insurance, commercial insurance, Vero New Zealand, and Suncorp Bank. Suncorp and competitors IAG Insurance and QBE Insurance dominate the Australian and New Zealand insurance markets.

(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.