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Dividend Stocks

Vinci’s Defensive Concessions Business Will Drive Robust Growth in 2022

Business Strategy & Outlook

Vinci’s strategy to extend the maturity of its concession portfolio will help the company earn durable excess returns. Vinci’s business models rests on managing and operating critical infrastructure over long concession contracts, such as motorways and airports. The company’s actions to increase the portion of its concession-driven revenue, over its short-cycle contracting business. The concessions business earns high profit margins and enjoys significant barriers to entry. In contrast, the contracting business is less attractive on a stand-alone basis but allows Vinci to draw on its knowledge of critical infrastructure to bid on large projects that require greater know-how and less competition, supporting higher margins. Its expertise is likely a factor behind winning major infrastructure works such as the Grand Paris Express and sections of the High Speed 2 line. Vinci’s highly profitable acquisition of toll roads from the French government in 2006 has formed the backbone of the firm over the past 15 years. However, subsequent public disapproval of the deal has seen the state become less generous in awarding long-term extensions to Vinci’s existing network. The shorter-term extensions to be awarded given the need to invest in the decarbonization of motorways. Mergers and acquisitions have helped Vinci become the second-largest airport operator, which enjoys similar barriers to entry as its autoroutes business. While air travel remains depressed due to travel restrictions, Vinci estimates that its airports are only 10% exposed to international long-haul traffic and thus should see a quicker recovery in traffic once travel restrictions are lifted. A return to pre pandemic passenger numbers in 2024. The acquisition of the energy contracting division of ACS will provide Vinci with exposure to the fast-growing renewable energy sector as well as eight concessions mainly in electrical transmission. The development of greenfield projects fits with its expertise and may be the start of the company committing more capital into the renewables sector with the aim of potentially also operating these long-dated assets.

Financial Strengths

Vinci has been able to withstand the worst of global travel restrictions, which have kept earnings from the group’s concessions business heavily depressed, without a significant impact on the group’s balance sheet. Vinci has enough liquidity to meet approximately EUR 3.2 billion of debt maturing in 2022, while still being able to reward investors with a healthy dividend and share buyback of up to EUR 600 million. Vinci’s healthy balance sheet has allowed the company to refinance debt at extremely attractive rates. 57% of the company’s debt is at fixed rates, protecting it against a rising interest rate environment. The Vinci will generate between EUR 4 billion-EUR 5 billion of free cash flow during the five-year forecast period, which incorporates the acquisition of the energy contracting division of ACS at an enterprise value of EUR 4.2 billion paid fully in cash. The net debt/EBITDA to drop below 2 times in 2022, due to the consolidation of ACS and recovery in earnings from the airport segment. Both Vinci’s airport and autoroutes businesses have experienced a sharp upturn in traffic as travel restrictions have eased.

Bulls Say

  • Vinci’s portfolio of diversified concession assets is a unique opportunity for investors to own irreplaceable infrastructure across multiple assets. Returns are supported by long-term concession contracts and favorable demographics. 
  • Vinci’s balance sheet and global presence position the company to boost its portfolio of high-quality assets, should governments look to privatize aging infrastructure. 
  • A healthy order book provides earnings visibility and allows the company to be more selective when bidding on construction projects without taking on additional risks.

Company Description

Vinci is one of the world’s largest investors in transport infrastructure. Significant concession assets include 4,400 kilometers of toll roads in France and 45 airports across 12 countries, making Vinci the world’s second-largest airport operator in terms of managed passenger numbers. The concession’s business contributes less than one fifth of group revenue but the majority of operating profit. Vinci’s contracting business is made up of three divisions, offering a broad variety of engineering and construction services.

(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

Keysight Dominates Communications Testing With a Broad and Comprehensive Portfolio of Solutions

Business Strategy & Outlook

Keysight Technologies is the leader in communications testing and measurement solutions, and offers a vendor-agnostic way to invest in the rapidly growing 5G market. Keysight has the strongest and broadest communications testing capabilities in the market, inclusive of hardware, software, and services. A comprehensive portfolio allows Keysight to act as a strategic partner to its customers, enabling new designs and accelerating time to market for network operators, network equipment OEMs, device OEMs, and suppliers. Keysight can reduce time to market for customers more than competitors as a result of its end-to-end portfolio of premium offerings. Keysight’s leadership stems from its large investment in R&D–annually doubling that of the nearest competitor–that it focuses on the communications market. The hefty organic and inorganic investment has led to Keysight leading the market pivot toward software and credit its unmatched portfolio breadth for its top market share. A broad portfolio that layers software and services on top of hardware embeds Keysight into customer workflows and entrenches customers in its ecosystem. A broad, sticky portfolio underpins the wide economic moat rating for the firm. Keysight should continue to dominate the communications market, especially as it pivots toward more complex 5G testing in which it is already demonstrating proficiency. The market share gains for Keysight and think greater complexity in 5G networks will expand its wallet share at customers–both of which would result in continued outperformance of the underlying testing market. The firm continues shifting customers to subscription billing for its software and services and thinks it will complement continued organic investment with strategic M&A to further build out its software portfolio. The growing mix of software and services to expand margins. Finally, the Keysight to continue generating impressive cash flow and to send a large proportion of it back to shareholders.

Financial Strengths

The Keysight Technologies to continue generating impressive cash flow, which will fund organic and inorganic investment as well as returns to shareholders. As of Oct. 31, 2021, the firm held a net cash position, with $2.1 billion in cash on hand and $1.8 billion in gross debt. The firm will stay leveraged–especially with its current long-term maturities–but pay off its debt as it comes due. The firm also has an untapped $450 million revolver that expires in February 2022.The Keysight to continue its record of strong cash generation. The firm has converted well over 100% of its net income into free cash flow since 2017, and this pattern to carry forward through the forecast. As per forecast over 100% free cash flow conversion through 2026 and anticipate more than $1 billion in free cash flow annually during this period.

Bulls Say

  • Keysight’s large research and development budget has created a competitively advantaged portfolio for communications testing that one doesn’t expect other firms would be able to easily replicate. 
  • Keysight holds a majority share of the 5G testing market, which will elicit strong top-line growth and expand profitability over the next five years. 
  • The Keysight to continue converting over 100% of net income into free cash flow, and predict it to generate over $1 billion in free cash flow annually over the forecast.

Company Description

Keysight Technologies is a leader in the field of testing and measurement, helping electronics OEMs and suppliers alike bring products to market to fit industry standards and specifications. Keysight specializes in the communications market, but also supplies into the government, automotive, industrial, and semiconductor manufacturing markets. Keysight’s solutions include testing tools, analytical software, and services. The firm’s stated objective is to reduce time to market and improve efficiency at its more than 30,000 customers.

(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

Carrier strives to reduce operating costs 2%-3% annually

Business Strategy and Outlook 

Carrier Global, a leading supplier of climate control and fire and security solutions, was spun off from United Technologies in April 2020. Carrier is a high-quality franchise with leading brands across most of its product portfolio. After the spinoff, Carrier increased spending on research and development, its sales organization, and capital projects to support product development and growth initiatives; this will help management accomplish its goal of mid-single-digit top-line growth over the midterm. Two of Carrier’s higher-profile growth initiatives include increasing its service attachment rate and becoming the leader in the applied HVAC market within five years. Carrier will successfully increase its service revenue, but it will be challenging to usurp Trane Technologies and Johnson Controls in the applied HVAC market.

Carrier’s HVAC segment (its largest segment at approximately 60% of sales) has the strongest long-term growth potential due to its commercial HVAC market exposure.  The commercial HVAC market will grow above GDP due to increased demand for energy-efficient and indoor air quality solutions. Residential HVAC demand remained robust in 2021-22, but there’s a cautious outlook. On the one hand, housing starts will rebound to 1.4-1.5 million units annually by 2025 after a near-term contraction in 2023-2024) and regulation changes (refrigerants and energy efficiency standards) should be a tailwind. On the other hand, the replacement cycle is maturing. Elevated investment spending, public company costs, and a challenging operating environment during 2020-21 due to the pandemic, supply chain disruptions, and cost inflation have pressured Carrier’s profit margins. However, Carrier strives to reduce operating costs 2%-3% annually. If the company can achieve its cost-cutting goal and expand its aftermarket mix, profit margins should improve, assuming healthy end-market demand and supply chains.

Financial Strength

After becoming a stand-alone entity following its April 2020 spinoff from United Technologies, Carrier now benefits from a narrowed strategic focus and complete autonomy over its capital allocation decisions. The company paid a price for its freedom; the separation left it saddled with a significant amount of net debt. However, Carrier generates significant free cash flow (about $1.7 billion annually over the last three years), and deleveraging has been a top capital allocation priority. In early 2022, Carrier completed the sale of Chubb, its service-centric fire and security business, for $2.7 billion net of taxes. Carrier expects to reduce debt by $750 million in 2022. At year-end 2021, Carrier had $9.7 billion of debt and $3.0 billion of cash on its balance sheet, which equates to a net debt/estimated 2022 EBITDA ratio of about 2. However, with the Chubb sale and Carrier’s 2022 free cash flow, the cash balance will swell to approximately $7.5 billion. Aside from paying down debt, the firm will allocate about $900 million to fund its acquisition of Toshiba’s remaining ownership stake in the Toshiba-Carrier joint venture, and management has earmarked $500 million for dividends and $1.6 billion for share repurchases in 2022. Carrier’s next maturing debt issuance isn’t until 2025, when its 2.242% $1.2 billion outstanding notes are due. Another $900 million is due in 2027, $2 billion is due in 2030, and $4.250 billion is due after 2030. Carrier’s debt maturities are well staggered, and no worries about solvency can be seen.

Bulls Say’s

  • After separating from United Technologies, Carrier is in full control of its destiny. Near-term reinvestment should boost its long-term growth prospects, and cost cutting initiatives should result in stronger profit margins. 
  • The company has significant franchise value with leading brands across most of its product portfolio. The flagship Carrier brand has demonstrable pricing power. 
  • In the wake of the coronavirus, air filtration, air-quality assessment, cold-chain solutions, and touchless access control solutions should become larger market opportunities.

Company Profile 

Carrier Global manufactures heating, ventilation, and air conditioning, refrigeration, and fire and security products. The HVAC business serves both residential and commercial markets (HVAC segment sales mix is 60% commercial and 40% residential). Carrier’s refrigeration segment consists of its transportation refrigeration, Sensitech supply chain monitoring, and commercial refrigeration businesses. The firm’s fire and security business manufactures fire detection and suppression, access controls, and intrusion detection products.

(Source: MorningStar)

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

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

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

Categories
Commodities

Celanese’s acetate tow sales will slightly decline over the long term

Business Strategy and Outlook 

Celanese is the world’s largest producer of acetic acid and its chemical derivatives, including vinyl acetate monomer and emulsions. These products are used in the company’s specialized end products or sold externally. Celanese produces these commodity chemicals in its acetyl chain segment (roughly 45% of 2022 pro forma EBITDA including acquisitions), which primarily serves the automotive, cigarette, coatings, building and construction, and medical end markets. Celanese’s Clear Lake, Texas, plant benefits from a cost-advantaged feedstock from low-cost U.S. natural gas. The company plans to expand acetic acid production capacity at Clear Lake by roughly 50%, which should benefit segment margins thanks to lower unit production costs relative to other geographies. The engineered materials, or EM, segment (45%) produces specialty polymers for a wide variety of end markets. Celanese is investing in the expansion of this business through acquisition. The company completed the acquisition of Santoprene in late 2021 and announced plans to acquire the majority of DuPont’s mobility and materials portfolio in a deal that should close by the end of 2022. Both deals add complementary products to Celanese’s existing portfolio. After the DuPont acquisition closes, the EM segment will generate the majority of revenue.

The automotive industry will account for the majority of EM segment revenue, while other key end markets include electronics. EM uses commodity chemicals, such as acetic acid, methanol, and ethylene to produce specialty polymers. Celanese should benefit from automakers light weighting vehicles, or replacing small metal pieces with lighter plastic pieces. Celanese should also see growth from increasing electric vehicle and hybrid adoption, as the company will sell multiple components specific to these powertrains. By 2030, the two thirds of all new global auto sales will be EVs or hybrids. Acetate tow, which is Celanese’s smallest segment, produces acetate tow primarily for cigarette filters. Cigarette sales are in secular decline across most countries, and Celanese’s acetate tow sales will slightly decline over the long term.

Financial Strength

Celanese is currently in excellent financial health. As of June 30, the company had around $3.8 billion in debt and $0.8 billion in cash. The net debt/operating EBITDA ratio of around 1. Celanese is undergoing a portfolio transformation, exiting legacy joint venture deals and acquiring new assets to increase its engineered materials portfolio, such as the Santoprene business from ExxonMobil. To continue this transformation, the company plans to acquire the majority of DuPont’s mobility and materials portfolio for $11 billion in cash, which will be largely financed through debt issuance. As a result, Celanese will carry elevated leverage ratios over the next several years from the time the deal closes, which will be the end of 2022. However, management will likely use excess cash to pay down debt. As EBITDA grows and debt levels fall, Celanese will be able to restore its balance sheet health within a few years of the deal closing. The cyclical nature of the chemicals business could cause coverage ratios to fluctuate from year to year. However, with the Santoprene and DuPont mobility and materials acquisitions, the more stable downstream engineered materials business will become the majority of total profits. As a result, Celanese should still generate positive free cash flow well in excess of dividends even in an economic downturn.

Bulls Say’s

  • Celanese built out its core acetic acid production facilities at a significantly lower capital cost per ton than its competitors thanks to the scale of its facilities (1.8 million tons versus average 0.5 million tons). 
  • Celanese should benefit from producing an increasing proportion of its acetic acid in the U.S. to take advantage of low-cost natural gas. 
  • Through acquisition, Celanese will transform the engineered materials business into a premiere chemicals business that will create value for shareholders.

Company Profile 

Celanese is one of the world’s largest producers of acetic acid and its downstream derivative chemicals, which are used in various end markets, including coatings and adhesives. The company also produces specialty polymers used in the automotive, electronics, medical, and consumer end markets as well as cellulose derivatives used in cigarette filters.

 (Source: MorningStar)

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

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

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

Categories
Commodities

AGL Energy’s Earnings Have Probably Bottomed; Strong Recovery From 2024 Is Likely

Business Strategy & Outlook

AGL Energy is one of Australia’s largest integrated energy companies. It has a narrow economic moat, underpinned by its low-cost generation fleet, concentrated markets, and cost-advantages from vertical integration. Earnings are dominated by energy generation (wholesale markets), with energy retailing about half the size. Strategy is heavily influenced by government energy policy, such as the renewable energy target. AGL Energy’s planned demerger was scrapped and the firm is undergoing another strategic review, with a focus on decarbonization strategies to keep banks happy. AGL Energy’s consumer market division services over 4 million electricity and gas customers in the eastern and southern Australian states, representing roughly a third of available customers. Retail electricity consumption has barely increased since 2008, reflecting the maturity of the Australian retail energy market and declining electricity consumption from the grid. Despite deregulation and increased competition, the market is still dominated by AGL Energy, Origin Energy, and Energy Australia, which collectively control three fourths of the retail market. AGL Energy’s wholesale markets division generates, procures, and manages risk for the energy requirements of its retail business. The acquisition of Loy Yang A and Macquarie Generation means electricity production significantly outweighs consumption by its retail customers. Exposure to energy-price risks are mitigated by vertical integration, peaking generation plants and hedging. More than 85% of AGL’s electricity output is from coal-fired power stations. AGL Energy has the largest privately owned generation portfolio in the National Electricity Market, or NEM.

Financial Strengths

AGL Energy is in reasonable financial health, but banks are increasingly reluctant to lend to coal power stations because of risks to their reputations. This poses a risk despite the firm’s relatively conservative credit metrics. From 1.4 times in 2020, net debt/EBITDA increased to 2.3 times in fiscal 2022 as earnings fell. Nonetheless, net debt/EBITDA is in line with Australian and New Zealand peers, and reasonable. The rapid improvement to a conservative 1.5 times in fiscal 2024. Funds from operations interest cover was comfortable at 13 times in fiscal 2022, comfortably above the 2.5 times covenant limit, and should remain strong as earnings growth offsets expectations for costs of debt to rise. AGL Energy aims to maintain an investment-grade credit rating. To bolster the balance sheet amid falling earnings and one-off demerger costs, the dividend reinvestment plan will be underwritten until mid-2022. Dividend payout ratio is 75% of EPS, though may be cut to help fund investment in renewable energy.

Bulls Say

  • As AGL Energy is a provider of an essential product, earnings should prove somewhat defensive. 
  • Its balance sheet is in relatively good shape, positioning it well to cope with industry headwinds. 
  • Longer term, its low-cost coal-fired electricity generation fleet is likely to benefit from rising wholesale electricity prices.

Company Description

AGL Energy is one of Australia’s largest retailers of electricity and gas. It services 4 million retail electricity and gas accounts in the eastern and southern Australian states, or about one third of the market. Profit is dominated by energy generation, underpinned by its low-cost coal-fired generation fleet. Founded in 1837, it is the oldest company on the ASX. Generation capacity comprises a portfolio of peaking, intermediate, and base-load electricity generation plants, with a combined capacity of 10,500 megawatts.

(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

BMW well placed to leverage from its BEV models making it attractive for ESG investors.

Investment Thesis:

  • Among the most recognized luxury car brands in the world, with approximately 10% market share in the premium market.
  • Growth in electric vehicles penetration provides an opportunity. 
  • Undemanding valuation and attractive dividend yield.
  • Potential for further consolidations or partnerships/JVs in the industry.
  • Key large investors provide some stability to overall share registry – Stefan Quandt (25.8%) and Susanne Klatten (19.2%).
  • BMW’s Financial Segment (new vehicle finance or leasing) provides a key competitive advantage for the Company in times of traditional lenders (e.g. banks) drying up liquidity. 

Key Risks:

  • Macroeconomic conditions (moderating global growth and its impact on demand), in particular demand significantly falls in China.
  • Competition and potential pricing pressure in luxury brands’ segment.
  • Electric vehicle strategy is not without risk and competition is likely to be high.
  • Potential impacts from Brexit and U.S. trade talks in earnings and supply chain disruption
  • Value destructive acquisition(s).
  • Substantial investors (with also board representation) mean capital management initiatives such as share buybacks are never likely to be considered despite the strategy offering attractive returns for the broader shareholder base.

Key Highlights:

  • FY22 outlook. Management expects; (1) Automotive segment EBIT margin to be 7-9% with decline in deliveries partially offset by positive price and mix effects and the continued development of the used car markets, and ROCE to be 14-19%. (2) Motorcycles segment EBIT margin to be 8-10% driven by slight increase in deliveries, and ROCE to be 19-24%. (3) Financial Services segment ROE to be 17-20% (vs prior forecast of 14-17%) primarily due to good performance in the used car markets, with the segment already recognising appropriate levels of provisions/allowances to cover residual value and credit risks. (4) Deliveries to slightly decline y/y as business conditions continue to remain difficult in 2H22 with ongoing supply bottlenecks (particularly for semiconductors), the war in Ukraine and interruptions in supply chains being headwinds. However, the percentage of electrified vehicles to still increase significantly with sales of fully electric vehicles more than doubling y/y. 
  • 1H22 results summary. Compared to pcp: Revenues climbed +19.1% to €65.912bn, despite total vehicle deliveries falling -19.8% to 1.16m (still expanded its leading position in the global premium segment), driven by full consolidation of the Chinese subsidiary BBA. 
  • EBT rose +65.9% to reach an all-time high of €16.156bn with margin improving +690bps to 24.5%, driven by tailwind of € 7.7bn from the revaluation of previously held BBA shares at fair market value, partially offset by +23.3% increase in cost of sales and +14.3% increase in R&D costs.
  •  NPAT increased +73.6% to €13.232bn. 
  • Capex increased +71.4% to €2.929bn due to upfront expenditures for the ramp-up of e-mobility and investments at BBA. 
  • 1H22 segment results. Compared to pcp: Automotive revenues rose +18.8% to €56.7bn, benefiting from positive pricing, product mix effects and growth in aftersales business which combined with +23.1% increase in cost of sales (headwinds from full consolidation, rising raw material and energy prices and higher R&D costs) delivered -22% decline in EBIT to €4.83bn with margin declining -450bps to 8.5%. FCF increased +58.5% to €7.77bn driven by acquisition of BBA’s liquid funds with management targeting FY22 FCF of at least €10bn.
  •  Financial Services delivered EBT growth of +2.3% to €1.981bn as -20.8% decline in new contracts with retail customers amid limited availability of new cars and intense competition in the financial services sector was more than offset by increased financing volume per vehicle.
  • Motorcycles revenue increased +2.6% to €1.663bn despite sales volume remaining flat y/y, however, EBIT declined -17.3% to €235m with margin down -340bps to 14.1%.

Company Description:

Bayerische Motoren Werke AG (BMW) is a leading manufacturer and retailer of luxury cars and motorcycles globally. The Company is increasingly focused on producing electric vehicles, with the group selling more than 140,000 electrified vehicles during 2018.  BMW Group brands include BMW, Mini and Rolls-Royce. 

(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

BAC’s asset quality remains strong and efficiencies in costs should help self-fund new investments in tech and marketing which should help gain market share

Investment Thesis:

  • Attractive valuation versus the price target. 
  • Leveraged to the improving economic conditions and activity in the U.S. 
  • Efficiency gains at the expense line exceeds market expectations. 
  • Significant leverage to the yield curve steepening in the U.S.
  • Cost out program to support earnings over the long-term. 
  • Revenue growth driven by consumer and business. 
  • Credit quality is very strong, with further reserve releases possible.  
  • Capital position is well above requirement level and management’s desired buffer, which opens up capital management initiatives.  

Key Risks:

  • Further decline in net interest margins from low yields and U.S. Fed interest rate cuts.
  • Intense competition to loan growth.
  • Subdued economic growth or a shallow/deep recession.
  • Funding pressures for deposits and wholesale funding. 
  • Political and regulatory changes affecting the banking legislation.
  • Credit risk with potential default of mortgages, personal and business loans and credit cards.
  • Efficiency gains disappoint relative to market expectations.

Key Highlights:

  • 2Q22 result summary.  Revenue (net of interest expense) increased +6% y/y to$22.7bn, with Net interest income (NII) up +22% y/y to $12.4bn (yield up +25bps to 1.86%), driven by higher interest rates, lower premium amortization and loan growth, and non-interest income down -9% y/y to $10.2bn, driven by lower investment banking fees, mark-to-market losses related to leveraged finance positions and lower service charges due to non-sufficient funds and overdraft policy changes, partially offset by higher sales and trading revenues.  
  • Non-interest expense increased +2% y/y (flat qoq) to $15.3bn and included $425m recognized for certain regulatory matters.
  •  Net income of $6.2bn, declined -32% y/y as pcp benefited by positive tax adjustment from revaluation of U.K. deferred tax assets of $2bn and $2.2bn in credit reserves releases, with Consumer Banking decreasing -5% y/y to $2.9bn, Global Banking decreasing -38% y/y to $1.5bn, Global Markets increasing +12% y/y to $1bn and Global Wealth & Investment Management increasing +16% y/y to $1.2bn.
  • Average loan and lease balances up +12% y/y to $1.0 trillion led by strong commercial loan growth as well as higher consumer balances and average deposits up +7% y/y to $2.0 trillion.
  • CET1 declined -100bps y/y (up +10bps qoq) to 10.5%, however, remains well above 2Q minimum requirement of 9.5% and +10bps above expected minimum required on October 1, with management expecting to build some additional buffer on top of that in 3Q.
  • Shareholder returns of $2.7bn ($1.7bn in dividends and $1bn in repurchases).
  • NII outlook. Assuming forward curve (as on July 15) materializing (asset sensitivity on a spot basis to a 100bps rate hike would be $5.8bn), modest growth in loans and deposits and deposit betas reflecting disciplined pricing, management expects net interest income in 3Q22 to increase by $900m-1bn qoq, further growing at a faster pace on a sequential basis in 4Q22, which combined with combined with expense discipline should boost the bottom line. 
  • Strong asset quality. Asset quality continued to remain strong with net charge-offs declining -4% y/y to $571m resulting in a net charge-off ratio of 23bps (down -4bps y/y), however, bank took a provision for credit losses of $523m (vs release of $1621m in pcp) amid loan growth and builds for a dampened macroeconomic outlook in the future. Though a slowdown in economy/recession brings risks of worsening credit profile, the BAC’s loan portfolio remains solid and carries less inherent risk compared to prior downturns, with lower concentration in the consumer portfolio (down -22% vs 4Q09), less exposure to unsecured consumer credit (down -48% vs 4Q09) and home equity loans (down -82% vs 4Q09), and 92% of commercial loan book either investment-grade or secured with Fed’s stress test indicating significantly lower credit losses expected in a severe downturn (5.2% vs 6.9% in 2013) and the bank holding much higher liquidity with global liquidity sources having increased 5x over 4Q09.

Company Description:

       Bank of America (BAC) is one of the largest banks in the U.S., serving consumers, small and middle-market businesses, and large corporations with a full range of banking, investing, asset management, and other financial and risk management products and services.

      (Source: Banyantree)

      DISCLAIMER for General Advice: (This document is for general advice only). This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937. The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate. Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

EQIX posted strong 2Q22 results, with revenue of $1.817bn and net income of $216m

Two young women talking together with a tablet in the living room. They sit spaced apart to prevent the virus.

Investment Thesis

  • By considering the quality of the business, EQIX is trading at fair valuation (from the perspective of trading multiples, dividend yield and the DCF valuation).
  • Attractive long-term outlook in global digitization and data requirements of companies, with 5G and cloud computing as key drivers.
  • Businesses moving away from on-premise centers towards colocation and cloud networks.
  • Diversified client base and revenue stream minimizes contractual risk.
  • Opportunity for future market share expansion via potential acquisitions. 

Key Risks

  • Increases to operating expenses – particularly electricity costs. However, the contracts between Equinix and its customers provide for rights and protection clauses to permit the Company to pass on electricity cost increases that exceed 5%.
  • Rising technology and acceptance of cloud-based services may incentivise businesses to fully leverage cloud infrastructure rather than connecting with IBX data centers. However, management has downplayed these concerns, stating that there must still be direct interconnection between Cloud and businesses within the data centers.
  • Newer IBX data centers have twice the cooling needs as old centers. Potential power limitations could force the company to have a lower utilization rate of its cabinets.  
  • Increased competition in the industry from the likes of Google, Apple, Microsoft and Digital Realty Trust, and the possibility of formation of strong strategic alliances amongst competitors 
  • EQIX is subject to exchange rate risk due to the company’s diverse geographical scale of operations. However, the company hedges many of these exposures. 
  • REIT classification mandates a minimum of 90% of taxable income paid to shareholders. This may hinder EQIX’s ability to increase its cash via retained earnings and could render the company’s balance sheet inflexible.

Key Highlights 

  • For FY22 total revenues of $7.259-7.299bn, up +9-10% y/y (+10-11% normalized and in CC), an increase of $65m vs prior guidance offset by a $102m FX impact, adjusted EBITDA of $3.323-3.353bn with margin of 46%, an increase of $33mvs prior guidance excluding integration costs ($30m integration costs) offset by a $49m FX impact, AFFO of $2.636-2.666bn, up +8-9% y/y (+8-10% normalized and in CC) and an increase of $33m vs prior guidance offset by a $42m FX impact, AFFO per share of $28.77-29.10, up +6-7% y/y (+8-9% normalized and in CC), total capex of $2.313-2.563bn with recurring capex of $180-190m, and cash dividend of $1,132m (up +10% y/y) equating to DPS of $12.4 (up +8% y/y). 
  • For 3Q22 revenues of $1.827-1.847bn, up +1-2% qoq, adjusted EBITDA of $831-851m, and recurring capex of $42-52m. 
  •  Revenue increased +10% y/y to $1.817bn (vs guidance of $1.809-1.829bn), with America is up +11% y/y (+9% normalized in CC), EMEA up +11% y/y (and in normalized CC) and APAC up +5% y/y (+11% normalized in CC). 
  • Adjusted EBITDA increased +8% y/y to $860m (vs guidance of $828-848m) with margin of 47.3%, with Americas growing +15% y/y (+14% normalized in CC) with margin of 45.3% (up +190bps y/y), EMEA growing +13% y/y (+12% normalized in CC) with margin of 49.3% (up +50bps y/y), while APAC declined -10% y/y (-5% normalized in CC) with margin of 48.8% (down -770bps y/y).
  • Net Income increased +217% y/y to $216m, primarily due to strong operating performance and a favorable tax settlement and AFFO increased +9% y/y to $691m.
  • Capex was $495m (~55% of expansion cabinets in metros that generate >$100m of annual revenues), including recurring capex of $35, down -23% y/y and at lower end of guidance range of $33-43m.  

Company Description

Equinix is a leading company in internet connection and data centers. It is the global market leader in the colocation data center industry, providing data services and platforms for over 9800 companies across 24 countries. This allows companies to connect to their online ecosystem and meet their interconnection needs for their business operations. EQIX also offers additional solutions such as the Equinix Cloud Exchange Fabric to connect data centers to cloud networks, and the recently introduced Equinix SmartKey to offer encryption protection for the data security management of companies.

(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

Swiss’ Re’s leverage position and problems with its securitisation program led the business to complete a capital raise

Business Strategy and Outlook 

Swiss Re has a history of overly aggressive expansion and typically too much leverage. The first example of this can be seen in the acquisition of General Electric Insurance Solutions in the earlier part of the new millennium. This was financed through a combination of debt and share issuance, a historic and largest Swiss Re acquisition in that period. Furthermore, Swiss Re continued down a path of building out its reinsurance securitisation offering, structuring pools of credit, mortality and natural catastrophe risk. This did not work out well because Swiss Re increased correlation and dependence and when financial markets fell so did the value of these securities. Swiss Re’s leverage position and problems with its securitisation program led the business to complete a capital raise and take on Berkshire as a preferential terms investor. This investment built on a previously established relationship where Berkshire reinsured substantially all of Swiss Re’s yearly renewable-term United States mortality book, another area where Swiss Re had run into difficulties.

The latest round has been aggressive expansion for commercial insurance and this came back to bite the business. It is a business that is still overleveraged and one where the levels of debt do need to be addressed. However, from an operational perspective it is a company that is focusing on building a cleaner and more traditional reinsurance business, one that focuses on underwriting and shifts away from reliance on investment returns to fund unprofitable long-tailed lines of underwriting. There would be a turnaround in corporate solutions starting to come to fruition and the nascent stronger move into more specialist lines of business and find the management team to be a lot more disciplined. However, the business reigns in its buybacks and concentrates more on building out the long-term profitability of this business.

Financial Strength

Swiss Re does not have a particularly strong balance sheet. It would help the business immensely if management chose to pay down more debt. Swiss Re has around $11.2 billion of debt. The majority of this is long term, and the most substantial portions don’t mature for a few years. The shape of the debt isn’t well balanced, with the vast majority issued as subordinated. This means there are some pockets of very high interest rates and this is reflected in the broader group’s interest. Swiss Re pays an annual dividend that it intends to grow annually in line with long-term earnings growth and maintain the prior year’s dividend as a minimum level. The business also shares buybacks, though given the macro uncertainty it would be prudent if the business held off over the next few years from doing this.

Bulls Say’s

  • Swiss Re looks to be on the cusp of producing consistent results in the long term under the performing commercial insurance division. 
  • The quality of Swiss Re’s investment portfolio is high. 
  • Swiss Re pays a good dividend.

Company Profile 

Swiss Re was established in 1863 in Zurich. Since then the business appears to have cycled through quite a few strategies. Namely in the early part of the millennium Swiss Re took on an investment banker who eventually led the business. Over the next 10 years CEO Jacques Aigrain built Swiss Re’s financial solutions into a powerhouse and helped the company complete its first securitisation, finalised in 2005 for credit reinsurance. This division became a leader for Swiss Re but then disaster struck during the global financial crisis. Swiss Re mothballed this unit and approved a CHF 5 billion capital raise. Now the business concentrates more fundamentally on property and casualty, life and health reinsurance. Swiss Re also has a good commercial insurance offering named corporate solutions.

 (Source: MorningStar)

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

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

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

Categories
Technology Stocks

L3Harris Posts Strong Bookings as Supply Constraints Limit Sales

Business Strategy & Outlook

Defense prime contractors are not born, they’re assembled. L3Harris Technologies, the sixth-largest defense prime by defense sales, was made from the merger of equals between L-3 Technologies, a sensor-maker that operated a decentralized business focused on inorganic growth, and the Harris Corporation, a sensor and radio manufacturer that ran a more unified business. Underpinning the merger’s thesis was an assumption that additional scale would primarily generate cost synergies but that eventually, the firms would produce meaningful revenue synergies. Defense primes are implicitly a play on the defense budget, which is ultimately a function of a nation’s wealth and its perception of danger. Despite increased U.S. fiscal leverage, defense spending will continue growing because of heightened geopolitical tensions caused by the Russia-Ukraine war. An increasing budgetary environment. That contractors will continue growing as modernization budgets increase to service the increased need to deter great powers conflict in Europe and Asia-Pacific. 

While it’s difficult at this stage to pinpoint exactly how far this defense spending upcycle will go, the heightened geopolitical tensions are likely to last for at least several years. Broadly, management’s thesis on the merger is accountable. Cost synergies, to a large extent, drove the 30-year wave of consolidation across the defense industry, which has largely generated shareholder value. Both L-3 and Harris had high revenue exposure to the defense sensors business and operated reasonably similar businesses, so one doesn’t see major execution risks in the merger. Arguably, L-3 was an ideal partner for a merger of equals because L-3 operated as a holding company and there are quite a few potential efficiencies from consolidating the firm into a more integrated firm. The three biggest firm-specific growth opportunities for L3Harris Technologies are the tactical radios replacement cycle, national security satellite asset decentralization, and international sales expansion.

Financial Strengths

The L3Harris is in solid financial shape. The firm increased debt by about $4.5 billion in 2015 to fund the acquisition of Exelis, a sensor-maker that was spun off from ITT and had been paying down debt since. The firm’s all-stock merger of equals with L-3 Technologies did not dramatically increase debt relative to size, and projecting a 2022 gross debt/EBITDA of roughly 2.0 times, which is quite manageable for a steady defense firm. The company is using the proceeds of portfolio divestitures for share repurchases, so one can anticipating EBTIDA expansion will be the driving force behind a decreasing debt/EBITDA over the forecast period. While the desire to compensate shareholders, the paying down debt may be more value accretive, as it would make us more comfortable decreasing the cost of equity assumption for the firm. While L3Harris has some exposure to commercial aviation (depending on definitions, roughly 5%-15% of sales), one cannot anticipate the firm will be materially affected by the downturn in commercial aviation. As demand for defense products has remained resilient, one cannot see the firm needing to raise capital any time soon. That noted, L3Harris produces a substantial amount of free cash flow and is not especially indebted, so anticipate that the company would be able to access the capital markets at minimal cost if necessary.

Bulls Say

  • There is substantial potential for cost synergies from the merger with L-3 due to the decentralized organizational structure of the pre-merger entity. 
  • L3Harris is at the base of a global replacement cycle for tactical radios, which will drive substantial growth. 
  • Defense prime contractors operate in a cyclical business, which could offer some protection if the U. S. enters a recession.

Company Description

L3Harris Technologies was created in 2019 from the merger of L3 Technologies and Harris, two defense contractors that provide products for the command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) market. The firm also has smaller operations serving the civil government, particularly the Federal Aviation Administration’s communication infrastructure, and produces various avionics for defense and commercial aviation.

(Source: Morningstar)

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