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Technology Stocks

Turnaround Displayed in Renault First-Half Results, Guidance Raised; FVE Increased to EUR 81

Business Strategy & Outlook

Renault owns 43.7% of Nissan, while Nissan owns roughly 15% of Renault and 34% of Mitsubishi. The alliance is structured as a partnership, with each company operating as an individual entity. Combined, the alliance stands as one of the largest global automakers. The companies benefit from increased scale, purchasing power, and the ability to share vehicle technology and platforms. The group is governed by the alliance board of Renault-Nissan BV, which is 50% jointly owned by Renault and Nissan. Boardroom and management upheaval from the Carlos Ghosn scandal was a huge distraction for the alliance. Renault installed Jean-Dominique Senard (formerly in charge of Michelin) as chairman. The company hired Luca de Meo as CEO (former head of SEAT), who started on July 1, 2020. Renault also owns 67.7% of the parent of Russian automaker AvtoVAZ, which makes Lada, the country’s best-selling brand. However, on March 23, 2022, the company said it may write down its Russian assets, another turnaround setback. In addition, Renault owns 99.4% of Romanian automaker Dacia, and 80.0% of Samsung Motors. Nissan holds a 34% stake in Mitsubishi Motors. 

Renault has organized these companies into an integrated global alliance, sharing purchasing, information services, research and development, production facilities, vehicle platforms, and powertrains. Through its turnaround plan, dubbed “Renaulution” and initiated in 2020, Renault will focus on its geographic market strength and better utilization of alliance cost efficiencies. In the Western European new-car market, Renault has the third-largest share, trailing Volkswagen and Stellantis. To its detriment, Renault has only had limited exposure to China, the world’s largest auto market, but upon the formation of a joint venture with Chinese automaker Dongfeng, local production began in 2017. Nissan has successfully penetrated the China market, annually selling more than 1.0 million units. Renault also has production facilities in Brazil, India, Russia, and Turkey. Through its own operations and through those of its alliance partners, Renault has a solid presence in Eastern Europe, South America, and South Korea.

Financial Strengths

Renault’s automotive business has significant financial leverage, but as per opinion, this is not overly burdensome relative to the company’s substantial cash position. With financial services on an equity basis, total debt/EBITDA has averaged 1.0 times during the period from 2011 to 2021 but was negative 9.7 times at the end of 2020 due to operating losses from COVID-19. The ratio was 3.4 times at the end of 2021. Adding in the impact of operating leases and netting cash against debt, net adjusted debt/EBITDAR during the same period averaged negative 0.2 times, with 2020 coming in at negative 4.2 times, and year-end 2021 at 0.9 times. Before 2008, with financial services on an equity basis, total debt/EBITDA was around 1.5 times. On lower EBITDA and higher outstanding debt in 2008 and 2009, the leverage ratio jumped to 3.6 and 20.6 times, respectively. In early 2009, the company received a EUR 3 billion loan from the French government to reduce refinancing risks associated with accessing credit markets at extremely high interest rates. In 2012, Renault also sold its entire stake in AB Volvo to reduce indebtedness. In response to the coronavirus pandemic, the company announced that it would not pay a dividend in 2020 on 2019’s financial results. Also, the company arranged a EUR 5 billion credit line guaranteed by the French government, on which it drew down EUR 4 billion. At the end of 2020, the undrawn EUR 1 billion was no longer available. Management targets full reimbursement of the French guaranteed loan by the end of 2023. Total liquidity of the automotive group was EUR 17.3 billion at the end of 2021, including a EUR 3.4 billion undrawn credit line and EUR 13.9 billion in cash.

Bulls Say

  • Renault’s alliance with Nissan provides scale and purchasing power that the company would otherwise struggle to achieve on its own. 
  • Renault is the largest manufacturer of light commercial vehicles in Europe, excluding pick-ups, with around a 16% share of the market and a 25% share of the electric LCV market. 
  • The company’s low-cost products, like the Dacia Logan, have benefited from increased demand for value-priced vehicles by cost-conscious consumers.

Company Description

Renault possesses a global alliance of automotive manufacturing, financing, and sales operations. The company’s alliance partners consist of AvtoVAZ (67.7%), Dacia (99.4%), Nissan (43.7%), Renault Samsung Motors (80.0%), and Mitsubishi (Nissan owns 34%). Total 2021 Renault-Nissan-Mitsubishi alliance sales volume of 7.9 million vehicles makes the alliance the third-largest vehicle group in the world, behind Toyota at 10.5 million and Volkswagen at 8.6 million vehicles sold.

(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
Commodities Trading Ideas & Charts

Improving Offshore Activity Supports Strong Sequential Revenue Growth in Saipem’s Second Quarter

Business Strategy & Outlook

Saipem offers services in four distinct business lines: offshore engineering and construction, or E&C, onshore E&C, offshore drilling and onshore drilling. Offshore E&C is historically one of Saipem’s larger segments, historically representing a bit over 40% of the overall business. Generally, E&C firms manage an array of vessels (often owned) and equipment in addition to overseeing project management and engineering activities involved in developing the well. They also typically manage manufacturing operations, such as pipes fabrication. Saipem is one of the larger offshore E&C providers, mainly competing with Subsea 7 and TechnipFMC. The high degree of engineering expertise required to win contracts in the offshore space partially protects Saipem and its peers from high competition, which helps protect pricing power. Offshore E&C tends to be a profitable segment, though its high reliance on fixed-price contracts introduces a good deal of operating risk. 

Increased investment in offshore oil and gas production will provide numerous opportunities for growth in this segment over the next five years, while Saipem’s internal measures (mainly reducing its high capital intensity) will improve margins over time. Onshore E&C is Saipem’s other largest segment, averaging about 43% of the overall business prior to the pandemic. The segment features much lower operating profits, averaging just over 2% prior to the pandemic. Saipem targets infrastructure contracts, mostly for downstream oil and gas projects. Recently, Saipem aims to target contracts that will provide longer-term revenue streams, including biorefineries and fertilizer plants. Expanding beyond traditional oil and gas end-markets means Saipem will compete with generalist E&C providers, reducing the firm’s ability to command the same kind of pricing premiums enjoyed by its offshore E&C business. Overall, the Saipem’s profitability will improve over the next five years as capital expenditure expands in both onshore and offshore markets.

Financial Strengths

Following the capital increase in July 2022, the Saipem’s financial strength is sound. Over the last five years, net debt/EBITDA has averaged around 1.5 times. As Saipem’s profitability improves, This will settle below one time by mid cycle. At the last reporting period, Saipem’s total debt outstanding was EUR 3.7 billion. This includes five tranches of EUR 500 million notes maturing in 2023, 2025, 2026, and 2028, respectively. As such, the Saipem will have sufficient liquidity to make its payments, with about EUR 2 billion in cash on hand as of the last reporting period and EUR 1 billion available on an untapped credit facility. The 2022 debt to capital will be 50%, in line with the firm’s historic average.

Bulls Say

  • Saipem’s early investment in offshore wind will allow the firm to benefit from the very high growth expectations for offshore wind investment over the next decade. 
  • The firm’s shift to a more asset-light business coupled with longer-term contracts will reduce the impact of downcycles on the firm’s operating results. 
  • The company’s XSIGHT division will help XSIGHT develop more integrated product offerings that create a stickier customer base over time.

Company Description

Saipem is a conglomerate of oil and gas engineering and construction and drilling services. The company began as the services appendage of oil major Eni, although today Eni as a customer account for generally less than 10% of revenue. Saipem is distinguished for leading industry megaprojects like the Nord Stream pipeline carrying large volumes of natural gas from Russia to European 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.

Categories
Dividend Stocks

Mercedes-Benz Is a World Leader in Premium and Luxury Automobiles

Business Strategy & Outlook

Daimler AG completed the spinoff of its truck and bus operations on Dec. 10, 2021 and changed its name to Mercedes-Benz Group AG on Feb. 1, 2022. In 2021, the truck and bus business, now called Daimler Truck AG, accounted for 20% of consolidated revenue including discontinued operations and 11% of group adjusted EBIT. The remaining operations of Mercedes-Benz Group include premium and luxury passenger vehicles and light commercial vans as well as Mercedes-Benz Mobility, which includes financial services and other mobility services like ride-hailing. The highly regarded Mercedes-Benz brand is one of the top luxury automobile names in the world. The firm is also a European leader in commercial vans. Even so, Mercedes faces stiff competition in all of its markets. The company operates in the cyclical, capital-intense, highly competitive passenger vehicle industry where raw material commodity costs can be volatile and unionized labor can be expensive. 

Geographically diverse sales reduce exposure to the economic conditions of any one region. Even so, premium brands such as Mercedes-Benz limit exposure to downturns suffered by mass-market auto companies because wealthier customers’ spending is less sensitive to recessions. Global population growth of high-net-worth individuals has averaged 5%, increasing Mercedes’ addressable market, faster than the 1%-3% rate for long-term global light-vehicle demand growth. New products are critical to spurring consumer interest and can help results even in an economic downturn. Mercedes-Benz launches new or significantly refreshed models in various markets around the world every year. Research and development spending, including capitalized development costs, is substantial, averaging roughly 6% of sales, which is a necessary part of a long-term strategy. Environmental legislation worldwide forces automakers to design vehicles with more efficient combustion engines and electrified powertrains. By 2030, the company says it will be “ready to go all-electric.”

Financial Strengths

One can consider Mercedes-Benz’ balance sheet to be in good shape. The company maintains a substantial cash balance and healthy availability on bank lines of credit. To remain competitive, automakers need high liquidity to fund R&D and capital investment to support product launches throughout economic cycles. At the end of 2021, the company had net industrial liquidity of EUR 21.0 billion (cash and credit line availability less debt). The company has healthy liquidity. The industrial business’ total adjusted debt/EBITDAR, which takes into consideration rent expense and operating leases, has averaged 0.7 times since 2011, which is strong for a capital-intensive, cyclical passenger vehicle maker. Financial liability maturities, including financial services, appear to be well laddered and matched with maturing financial loan assets. Mercedes’ consolidated capital structure is complex from its captive finance operations, which support industrial operations’ sales by providing credit to dealers and consumers but also have banking operations and other financial services. Aside from its balance sheet cash hoard, the company relies mostly on notes and bonds for its funding requirements but also uses lines of credit, deposits from banking customers, and commercial paper. The consolidated capital structure’s total debt/total capital historical average since 2011 is 63.0%. Taking Mercedes’ substantial cash position into account, net debt/total capital averages 51.6%. With the financial-services business accounted for on an equity basis, Mercedes’ total debt/total capital averages 13.8%, while net debt/total capital averages only negative 11.5%, denoting an average net cash position.

Bulls Say

  • Mercedes-Benz is a highly recognizable, well respected global luxury brand, giving the company a modest buffer against the cyclical downturns of auto sales. 
  • Mercedes’ strong R&D capabilities and electrified powertrain technologies should prove valuable because of global clean-air legislation. 
  • Management’s long-term return on sales targets are higher than what is model, so upside potential exists to the valuation.

Company Description

Based in Stuttgart, Germany, Mercedes-Benz Group AG makes premium passenger vehicles and commercial vans. Brands include Mercedes-Benz, AMG, and Maybach. Mercedes-Benz Mobility provides the company’s dealers and its customers with vehicle financing as well as mobility services in ride hailing, car sharing, and charging. Mercedes owns 11.9% of Aston Martin and 9.6% of Beijing Automotive Group. Li Shufu, chairman of Chinese automaker Geely Automobile, owns 9.7% of Mercedes-Benz. Other major shareholders include Kuwait Investment Authority at 6.8% and Beijing Automotive group at 5.0%.

(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

Strong Execution Continued Into Q2 at T-Mobile; Shares Modestly Undervalued

Over the shoulder view of and stock broker trading online while accepting orders by phone. Multiple computer screens ful of charts and data analyses in background.

Business Strategy & Outlook

T-Mobile’s strong brand and reputation, coupled with its industry-leading spectrum position, provides it with an opportunity to drive strong revenue and profit growth over the next couple of years. Longer term, a rational competitive landscape will allow the firm and its rivals to deliver stable, if modest, cash flow growth. In the five years leading up to the Sprint acquisition, T-Mobile expanded its postpaid phone customer base nearly 60% while the rest of the industry stagnated. Despite this growth, T-Mobile remained far smaller than AT&T or Verizon, putting it at a scale disadvantage evident in significantly lower profitability than its larger rivals. With the addition of Sprint, though, T-Mobile is larger than AT&T and reasonably close to Verizon. The combination of scale and strong management should serve T-Mobile well. 2022 will be an important year, as the firm shuts down the Sprint networks and fully moves Sprint customers to T-Mobile’s network and systems, but one has little reason to doubt this process will go smoothly, as integration thus far has been impressive. 

The T-Mobile network will match up well with that of its rivals over the long term, and it is worthy of a narrow economic moat rating. Importantly, the massive amount of spectrum the firm now controls puts it in a strong position. Its mid band spectrum holdings, which will likely provide the bulk of wireless network capacity well into the future, are massive and largely unused. The firm avoided matching Verizon and AT&T egregious spending in the C-band spectrum auction as a result. Efficiently and effectively deploying this resource, something Sprint failed to do on its own, is now the firm’s primary objective. T-Mobile’s network isn’t perfect. The firm doesn’t own significant fixed-line assets, which will likely be increasingly important as wireless networks become denser. The firm will have access to third-party networks on reasonable terms, but this remains a risk. T-Mobile also leases many of its spectrum licenses and will need to renew leases or purchase licenses outright in the coming years.

Financial Strengths

T-Mobile had done a great job of reducing leverage over the past few years while Sprint had moved in the opposite direction. The merged firm started life with about $64 billion in debt net of cash, equal to about 2.9 times EBITDA, or about 3.5 times adjusted for Sprint’s heavy use of phone leases. Since the merger, T-Mobile has primarily used free cash flow to reduce leverage, but its participation in the C-band spectrum auction, where it spent $9.3 billion, pushed net debt up to $72 billion at the end of the first quarter of 2022. Growth in the business has still allowed net debt to remain at 3.0 times EBITDA. Net leverage also sits at 3.0 times “core-adjusted” EBITDA, which excludes integration costs but also eliminates the accounting benefit from phone lease revenue. T-Mobile management had said it believes it can run the business with leverage in the 3.0-4.0 times range but now targets leverage at a mid-2s multiple of core adjusted EBITDA, a level it believes it can hit by the end of 2022. Management has said it would need to cut leverage below 2.5 times to receive an investment-grade rating from the major agencies but notes that it has been able to borrow at rates only modestly higher than AT&T in recent years. The firm has also received an investment-grade rating on its secured borrowings. One suspect less favorable debt market condition would have a significant impact on T-Mobile’s borrowing costs. Taking leverage down to around 2.5 times adjusted core EBITDA seems reasonable but one wouldn’t be opposed if the firm drove leverage lower still given the ups and downs of the wireless industry and the financial capabilities of rivals AT&T and Verizon. Management expects to begin returning capital to shareholders in 2023, saying it could buy back up to $60 billion of its shares through 2025.

Bulls Say

  • After several years of unprecedented success, T-Mobile has the wind at its back. The firm’s reputation with consumers is as strong as ever, and its network is delivering better service than the other carriers. 
  • The Sprint merger has catapulted T-Mobile near the top of the industry, with ample scale to compete and a spectrum portfolio no other carrier can match. Heavy network investment will bring operating costs savings and a lead in 5G. 
  • Free cash flow, already positive during the Sprint integration, should grow sharply, providing the ability to return capital to shareholders.

Company Description

Deutsche Telekom merged its T-Mobile USA unit with prepaid specialist MetroPCS in 2013, creating T-Mobile US. Following the merger, the firm provided nationwide service in major markets but spottier coverage elsewhere. T-Mobile spent aggressively on low-frequency spectrum, well suited to broad coverage, and has substantially expanded its geographic footprint. This expansion, coupled with aggressive marketing and innovative offerings, produced rapid customer growth. With the Sprint acquisition, the firm’s scale now roughly matches its larger rivals: T-Mobile now serves 71 million postpaid and 21 million prepaid phone customers, equal to around 30% of the U.S. retail wireless market. In addition, the firm provides wholesale service to resellers.

(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

TE Connectivity’s Strong Q3 Outweighs Macro Uncertainty; $125 Fair Value Estimate

Business Strategy & Outlook

TE Connectivity is a designer and manufacturer of connectors and sensors, supplying custom and semi custom solutions to a bevy of end markets in the transportation, industrial, and communications verticals. TE has maintained a leading share of the global connector market for the last decade, specifically dominating the automotive connector market, from which it derives almost half of revenue. While the firm’s entire business benefits from trends toward efficiency and connectivity, these are especially notable in cars, where shifts toward electric and autonomous vehicles provide lucrative opportunities for TE to sell into new vehicle sockets, like an onboard charger or advanced driver-assist system. TE’s products offer high performance and reliability for mission-critical applications in harsh environments. As such, its customer relationships tend to be very sticky, with customers facing high financial and opportunity costs from switching to another component supplier, as well as the risk of component failure in new products.

TE’s customers also rely on the firm supplying cutting-edge products to power new capabilities in end applications. As older products become commoditized, the firm is able to maintain high prices with new innovations. As a result of these switching costs and pricing power, the TE Connectivity possesses a narrow economic moat. In the future, TE Connectivity will focus on increasing its dollar content in end applications across its end markets. TE’s products pave the way for greater electrification and connectivity in vehicles, planes, and factories, which allows the firm to occupy a greater portion of these end products’ electrical architectures. The TE will remain a serial acquirer, bolting on smaller components players to expand its geographic and technological reach. Finally, the TE to continue expanding its midcycle gross and operating margins via footprint consolidation, as it streamlines the fixed-asset portfolio it has gained over a decade of acquisitions.

Financial Strengths

The TE Connectivity to remain leveraged, using strong free cash flow to invest organically and inorganically, and to send capital back to shareholders. As of Sept. 24, 2021, the firm carried $4.1 billion in total debt and $1.2 billion in cash on hand. While the firm is leveraged, its cash flow generation will be more than able to fulfill its obligations. TE has less than $700 million a year in payments due through fiscal 2026, and to generate more than $2 billion in free cash flow annually over the next five years. Even in a severely soft macro environment in 2020, the firm generated $1.4 billion in free cash flow. After fulfilling its obligations, the TE to use the remainder of its cash to maintain its dividend and conduct share repurchases. The firm will remain leveraged, using extra capital for opportunistic acquisitions while using its heady cash flow to pay off its principal and interest.

Bulls Say

  • TE Connectivity is a leader in the automotive connector and sensor market, enabling OEMs to build more advanced and efficient electric and autonomous vehicles. 
  • TE’s products are specialized for mission-critical applications in harsh environments, where reliable performance creates sticky customer relationships. 
  • TE’s ongoing footprint consolidation should allow it to expand its midcycle operating margins and improve its cash flow.

Company Description

TE Connectivity is the largest electrical connector supplier in the world, supplying interconnect and sensor solutions to the transportation, industrial, and communications markets. With operations in 150 countries and over 500,000 stock-keeping units, TE Connectivity has a broad portfolio that forms the electrical architecture of its end customers’ cutting-edge innovations.

(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

Nokia is a key provider of telecommunication hardware, software, and services to communication service providers

Laptop with chart on its display at workplace of economist

Business Strategy & Outlook

Nokia is a key provider of telecommunication hardware, software, and services to communication service providers. CSP equipment spending provides robust growth during generational wireless upgrade cycles followed by spending lulls, with 5G being the latest tailwind. 5G’s promise of connecting billions of wireless devices at incredible speed across more spectrum bands, along with more use cases than 4G, may offer Nokia more upside than previous wireless generations. However, one does not view Nokia’s core market as moat supportive because CSPs typically multisource equipment and possess purchasing power over their vendors. Nokia has a fundamentally strong strategy to remain a leader in its competitive environment after bloated initial 5G costs caused the firm to overhaul its products. 

Nokia’s core operation should benefit from 5G network infrastructures requiring more hardware to cover the increased quantity of spectrum bands and transmit at the highest speeds. Nokia’s solutions could appeal to a wider client base as industries integrate “Internet of Things” devices into their networks and enterprises build private wireless networks. The healthy demand for Nokia’s software and service offerings as software-defined networking becomes commonplace and customers desire solutions to optimize increasingly complex networks. Nokia’s technology segment creates revenue through licensing critical communication patents and receiving royalty payments through HMD’s Nokia-branded smartphone sales. Nokia has license agreements with leading 5G handset manufacturers, and the company has stated its intention to pursue licensing in industries such as automotive and consumer electronics. Alongside selling more enterprise private wireless networks, the 5G networks and Internet of Things device propagation offer Nokia a chance to be less reliant on CSPs’ generational network upgrade spending.

Financial Strengths

After taking corrective actions to remove excess costs in its 5G products, Nokia is a financially stable company that generates positive free cash flow as 5G networks are built out. While Nokia primarily funnels cash toward organic development, sales, and marketing efforts, the company has made minor acquisitions since its large Alcatel-Lucent purchase in 2015, and Nokia is well positioned to bolt-on smaller software, Internet of Things, or related technology firms as needed. Nokia finished 2021 with EUR 9.3 billion in cash and equivalents with a debt to capital ratio of 21%, and the company to repay its debts on schedule. As 5G networks are rolled out alongside cost-extraction efforts, the revenue growth to outpace operating expenditures as Nokia capitalizes on up-front 5G innovation expenditures while strengthening operational efficiencies. After pausing its dividend to fix bloated product costs in 2019, Nokia announced a plan to restart payments in 2022, alongside a buyback program.

Bulls Say

  • 5G should have more uses and a longer build-out cycle than previous wireless generations. Internet of Things device proliferation, from autonomous vehicles to smart factories, should broaden the demand for Nokia solutions. 
  • Nokia’s moving away from an end-to-end networking portfolio could be aligned with purchasing preferences. Its focus on software for 5G networks is wise, as enterprises may require custom data analytics and optimized networks. 
  • 5G may create licensing opportunities outside of handsets, and Nokia royalties could grow via a resurging smartphone brand.

Company Description

Nokia is a leading vendor in the telecommunications equipment industry. The company’s network business derives revenue from selling wireless and fixed-line hardware, software, and services. Nokia’s technology segment licenses its patent portfolio to handset manufacturers and makes royalties from Nokia-branded cellphones. The company, headquartered in Espoo, Finland, operates on a global scale, with most of its revenue from communication service providers.

(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
Commodities

Kinder Morgan Continues to Be Prudent in Hot Gas Market in Q2

Business Strategy & Outlook:    

Kinder Morgan’s assets span natural gas, natural gas liquids, oil, and liquefied natural gas. The company’s U.S. gas pipeline business is particularly impressive. Management claims its daily gas transportation capacity is equivalent to 40% of average U.S. gas consumption and it handles 50% of the LNG market. Kinder serves most major U.S. gas supply and demand regions. Kinder Morgan’s size is both an opportunity and a challenge. Its expansive asset footprint provides numerous investment opportunities if supply or demand bottlenecks develop. Kinder has the financial and commercial heft to execute any project, no matter the size. However, large-scale projects have been fleeting in the past few years, particularly as legal, regulatory, and stakeholder protests have successfully delayed and canceled major U.S. and Canadian pipelines. The shift forced Kinder out of Canada, particularly as Trans Mountain pipeline costs have soared since Kinder’s exit. With limited growth prospects, management has slashed investment, strengthened the balance sheet, and focused on returning cash to shareholders through the dividend and stock buybacks. For example, it has bought back $270 million in stock so far in 2022 with some of the cash generated by better-than-expected results. With ample excess free cash flows, Kinder is pursuing more clean energy investments. It already considers about 70%-75% of its backlog to be low-carbon investments, and it has formed an energy transitions group to pursue investments in renewable natural gas, biofuels, and carbon capture projects. 

The Kinetrex deal added several renewable natural gas projects at a highly attractive multiple in 2021, and it built on this success with the Mas CanAm deal in mid-2022. Given Kinder’s extensive experience with CO2 pipelines and processing facilities, it is better positioned than most U.S. peers to evaluate and invest in carbon capture and storage opportunities across its footprint, as well. Methane reduction is another opportunity, and Kinder has been working on this area since 2014 via its ONE Future efforts.

Financial Strengths:  

After stretching the balance sheet to consolidate in 2014, Kinder Morgan has completed its plan to strengthen its balance sheet and achieve investment-grade credit ratings while buying back stock and bringing the dividend back to a level in line with peers’. Kinder has channeled most of its cash into debt reduction recently. Debt/EBITDA peaked at 5.5 times following the 2014 consolidation, but Kinder has reached management’s 4.5 times target and should be able to maintain that on a normalized basis.  Leverage is expected to be about 4.3 times in 2022. Beyond 2022, leverage will eventually fall below 4 times. Kinder’s stable cash flow can support an investment-grade balance sheet, $1.5 billion of annual growth investment factoring in contributions from joint venture partners (or $2.35 billion factoring in sustaining capital spending), and a growing dividend. A drop in growth investment gives management more financial flexibility. Kinder’s dividend is expected to hit $1.25 per share in 2020, in line with management’s plan announced in 2017 after a 75% cut in 2016. But management abandoned that target, paying $1.05 per share in 2020 and $1.08 annualized in 2021. The dividend will eventually reach $1.20 a share in the next few years. Kinder’s share-buyback plan could expand as management looks for ways to deploy excess free cash flow, now that its balance sheet goals have been met and its growth investment has normalized. Management doesn’t expect to pay federal cash taxes for several more years even if the 2017 tax cuts are reversed.

Bulls Say: 

  • Kinder Morgan’s natural gas midstream footprint is unrivaled in North America, giving it high-return investment opportunities as gas supply/demand fundamentals shift.
  • The Kinetrex deal shows that Kinder is willing to aggressively pursue clean energy efforts, putting it well ahead of most peers.
  • After paying down $12 billion of debt since 2015, Kinder Morgan now has the financial flexibility to invest in growth projects, raise the dividend, and repurchase stock.

Company Description: 

Kinder Morgan is one of the largest midstream energy firms in North America, with an interest in or an operator on about 83,000 miles in pipelines and over 140 storage terminals. The company is active in the transportation, storage, and processing of natural gas, crude oil, refined products, natural gas liquids, and carbon dioxide. The majority of Kinder Morgan’s cash flows stem from fee-based contracts for handling, moving, and storing fossil fuel 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 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

SAP has further entrenched itself in X data with its acquisition of Qualtrics experience management software

LONDON, UNITED KINGDOM: Analysts work on the trading floor at Goldman Sachs in London, 22 March 2004. AFP PHOTO / ODD ANDERSEN (Photo credit should read ODD ANDERSEN/AFP via Getty Images)

Business Strategy and Outlook 

SAP is a best-in-breed enterprise resource planning provider and holds dominant market share in global ERP software. However, SAP is phasing out its support of its on-premises ERP software such that by 2030 all of its ERP customers will need to shift to a cloud solution. This vulnerability is a significant threat to SAP’s switching costs, as competitors like Workday offer compelling cloud ERP solutions, while forced migration opens up opportunity to question a company’s best fit for ERP needs. In turn, SAP’s narrow moat, derived from its switching costs, is trending negative. However, it is still early in SAP’s transition of on-premises users to the cloud, which leads us to believe its negative trend could be prolonged.

ERP is not SAP’s only offering. The company offers software in its so-called intelligent spending category, which includes Ariba and Concur, which cater to procurement and travel and expense reporting. While ERP and intelligent spending software caters to operational data–otherwise known as O data–SAP also provides solutions around X data, or experience data. SAP has further entrenched itself in X data with its acquisition of Qualtrics experience management software. But, regardless of which type of data is flowing through SAP software, this data can be stored in SAP’s database offering, HANA, which is the only database compatible with SAP’s cloud ERP, S/4HANA (unlike on-premises ERP’s former database interoperability). Despite SAP’s efforts to nurture high attach rates among offerings amid the vulnerable transition to the cloud, such as via database lock-in, this is only ruffling more feathers among its customers that have adapted to the new norm of mix-and-match technology, which the cloud has enabled. Such lock-in attempts were influential in SAP’s historically declining net promoter score. Moreover, SAP’s efforts to add to its ecosystem in the hopes of more effortless user experience have proved to be anything but accretive, as its acquisition of Qualtrics has shown. SAP announced plans to spin off the company only two years after it was acquired.

Financial Strength

SAP has been acquisitive over the last decade as it has built out its ERP offerings. Despite this, SAP has maintained healthy leverage ratios and continues to do so with 2019 net debt/EBITDA close to 2. This figure includes the EUR 7 billion of debt SAP issued in December 2018 to finance the Qualtrics acquisition, leaving it with outstanding long-term debt of roughly EUR 14 billion and EUR 7 billion in cash and marketable securities at the end of the fiscal 2020 third quarter. The Qualtrics acquisition has stretched SAP’s leverage ratio slightly beyond its normal levels over the last decade and may limit the company’s ability to make transformative acquisitions in the near future. SAP IS still having the ability to make tuck-in acquisitions, and with free cash flow of at least EUR 3 billion expected in 2020 and 2021, thus SAP is not having any troubles covering its financial obligations.

Bulls Say’s

  • SAP should be able to migrate the majority of its on premises ERP customers to S/4HANA while continuing to add hefty net new customers to the platform. 
  • As more customers transition to the cloud, SAP should be able to extract significantly more lifetime value per customer, adding to its top line. 
  • SAP should see significant margin expansion as a result of improving scale in its cloud offerings.

Company Profile 

Founded in 1972 by former IBM employees, SAP provides database technology and enterprise resource planning software to enterprises around the world. Across more than 180 countries, the company serves 440,000 customers, approximately 80% of which are small to medium-size enterprises.

 (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
Global stocks

Alphabet dominates the online search market with 80%-plus global share for Google

Business Strategy & Outlook

Alphabet dominates the online search market with 80%-plus global share for Google, via which it generates strong revenue growth and cash flow. The continuing growth in the firm’s cash flow, as Google will maintain its leadership in search. YouTube contributes more to the firm’s top and bottom lines, and the investments of some of that cash in moonshots as attractive. Whether they will generate positive returns remains to be seen, but they do present significant upside. Google’s ecosystem strengthens as its products are adopted by more users, making its online advertising services more attractive to advertisers and publishers and resulting in increased online ad revenue, which will continue to grow at double-digit rates after the pandemic and during the next five years. The firm utilizes technological innovation to improve the user experience in nearly all its Google offerings, while making the sale and purchase of ads efficient for publishers and advertisers. 

Adoption and usage of mobile devices has been increasing. The online advertising market has taken notice and is following its target audience onto the mobile platform. Google partakes in this on the back of its Android mobile operating system’s growing market share, helping it drive revenue growth and maintain its leadership in the space. Among the firm’s investment areas, it is particularly applauding the efforts to gain a stronger foothold in the fast-growing public cloud market. Google has quickly leveraged the technological expertise it applied to creating and maintaining its private cloud platform to increase its market share in this space, driving additional revenue growth and creating more operating leverage, which will continue. Most of Alphabet’s more futuristic projects are not yet generating revenue, but the upside is attractive if they succeed, as the firm is targeting newer markets. Alphabet’s autonomous car technology business, Waymo, is a good example: Based on various studies, it may tap into a market valued in the tens of billions of dollars within the next 10-15 years.

Financial Strengths

Alphabet has a very strong balance sheet with cash and cash equivalents of nearly $140 billion and total debt of nearly $15 billion at the end of 2021. The company also has a $4 billion revolver with no outstanding balance. Over 60% of the company’s cash and cash equivalents is held outside the U.S. The company generated $92 billion cash from operations in 2021, up 41% from 2020. The cash from operations to grow 17% annually through 2026. While continuing strong top-line growth, the firm continues to invest in innovation. Alphabet’s free cash flow to equity/gross revenue ratio averaged 23% over the past three years, which indicates strong operational and financial health. A five-year model average FCFE/sales ratio of 26% through 2026.

Bulls Say

  • As the number of online users and usage increase, so will digital ad spending, of which Google will remain one of the main beneficiaries. 
  • Android’s dominant global market share of smartphones leaves Google well positioned to continue generating top-line growth as search traffic shifts from desktop to mobile. 
  • The significant cash generated from the Google search business allows Alphabet to remain focused on innovation and the long-term growth opportunities that new areas present.

Company Description

Alphabet is a holding company. Internet media giant Google is a wholly owned subsidiary. Google generates 99% of Alphabet revenue, of which more than 85% is from online ads. Google’s other revenue is from sales of apps and content on Google Play and YouTube, as well as cloud service fees and other licensing revenue. Sales of hardware such as Chromebooks, the Pixel smartphone, and smart home products, which include Nest and Google Home, also contribute to other revenue. Alphabet’s moonshot investments are in its other bets segment, where it bets on technology to enhance health (Verily), faster internet access to homes (Google Fiber), self-driving cars (Waymo), and more. Alphabet’s operating margin has been 25%-30%, with Google at 30% and other bets operating at a loss.

(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
Small Cap

Bega has transformed from a dairy processor with a focus on B2B operations to a branded consumer food company with a more diversified earnings base

Business Strategy and Outlook 

Despite Bega Cheese’s strategic shift toward a more diverse product offering, dairy products continue to represent the majority of Bega’s sales over the next decade, exposing the firm to commodity pricing and volatile input costs. Bega has not carved an economic moat required to consistently generate economic profits, and the firm’s powerful customers to limit margin growth potential. Bega has transformed from a dairy processor with a focus on business-to-business operations to a branded consumer food company with a more diversified earnings base and less exposure to volatile milk prices. While dairy will remain a key category for Bega Cheese, the focus will be on high value products such as cream cheese and infant formula. In January 2021, Bega finalised the acquisition of Lion Dairy and Drinks from Kirin Group for AUD 534 million. As part of the acquisition, Bega acquired leading brands in milk-based beverages and yoghurt, white milk, and plant-based beverages, in addition to 13 manufacturing sites and Australia’s largest national cold chain distribution network.

Revenue is expected from the branded segment, which includes spreads, grocery products and Lion’s Dairy and Drinks portfolio, to expand at a CAGR of 15% to fiscal 2026, underpinned by new product innovation and bolt-on acquisitions. There are virtually no switching costs in the consumer foods category and the rising adoption of online shopping has made it easier for smaller, niche brands to take share as physical shelf space becomes less relevant. This reinforces the need for Bega to invest in its brands to maintain share. Historically, Bega Cheese has made limited investment in its brands, particularly in Australia where Fonterra is the licensee of the Bega brand, however since acquiring the spreads and grocery business in 2018, marketing spend as proportion of revenue has increased to 3% from 1% and it will remain in the higher level.

Financial Strength

Bega’s balance sheet is sound. Leverage, measured as net debt/EBITDA improved to 2.3 at June 30, 2021, from 2.4 at the prior period and comfortably below covenants. This is a pleasing position post the major acquisition of Lion Dairy and Drinks in fiscal 2021 which was funded through AUD 267 million of new and extended debt facilities and AUD 401 million equity raising. Further deleveraging in coming years as acquisition synergies are achieved, earnings improve and non core assets are divested, with net debt/EBITDA falling below 2.0 by 2024. Bega will continue to explore potential bolt-on acquisitions and partake in industry rationalisation. While the timing and scale of further acquisitions is uncertain, Bega has the capacity to pursue smaller acquisitions while maintaining a dividend payout ratio of 50% normalised EPS. Maintaining a relatively conservative balance sheet is prudent to weather potentially volatile earnings and afford capacity for future acquisitions should opportunities arise.

Bulls Say’s

  • Bega Cheese’s strategic shift away from dairy products lowers its exposure to volatile milk prices and diversifies the firm’s earnings. 
  • Bega has scope to improve margins through participating in industry consolidation, maximising plant utilisation and rationalising operations after several acquisitions in recent years. 
  • Bega is shifting investment to the spreads business, which is less commoditised and higher margin than dairy, with strong niche positions in Vegemite and peanut butter.

Company Profile 

Bega Cheese is an Australian based dairy processor and food manufacturer of well-known brands including Bega Cheese and Vegemite. Bega Cheese operates two segments: the branded segment which produces consumer packaged goods primarily sold through the supermarket and foodservice channels and the bulk segment which produces commodity dairy ingredients primarily sold through the business-to-business channel.

(Source: Morningstar)

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