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Dividend Stocks

Mercury is Primed for Growth on Recovering Generation, Acquisitions and Development

Business Strategy & Outlook:   

Mercury is one of New Zealand’s leading producers of electricity, accounting for more than 15% of the country’s total generation. The firm enjoys a good retail presence with Mercury Energy being the largest supplier of electricity in the key Auckland region, with an estimated market share of 40%. Mercury currently operates in a favorable environment dominated by four electricity producers. Barring regulatory change, the four major players will continue to generate favorable returns on invested capital in the long run. Mercury possesses strong competitive advantages and deserves a narrow economic moat rating. Installed capacity from the firm’s hydro and geothermal generation is equivalent to about 6800 gigawatt hours, or GWh, of annual production. The firm is building its first wind farm, with full completion in late 2021 increasing average annual generation to around 7640 GWh. 

The generation business is significantly hedged by the supply of electricity to residential and industrial customers, with the added ability to alter output, should weather conditions change. For instance, when wholesale prices are low, Mercury can opt to reduce hydro output if it is more cost-effective to purchase electricity for its retail business than to produce it, though its ability to do so is limited by relatively small lake storage. The firm is affected during a dry year because of lower hydro output, which comprises about 60% of generation in normal years. Its geothermal power plants and hedging to some extent alleviate dry-year risk and provide stability to the firm’s revenue and earnings. Nationwide electricity demand has been soft because of a combination of economic weakness and more efficient energy consumption by households and businesses. Retail markets have been challenging, owing to intense competition from both incumbent gentailers and pure-play energy retailers.

Financial Strengths:  

Mercury is in sound financial health. Gearing (as measured by debt/capital) was 26% in June 2021. Net debt/EBITDA was 2.9 times in fiscal 2021, a little higher than most peers. But earnings growth and the underwritten dividend reinvestment plan should reduce net debt/EBITDA back to 2.5 times in 2023. The likely debt-funded acquisition of Trustpower’s retail division should cause credit metrics to deteriorate a little further but remain comfortable. Maintenance capital expenditure in 2022 should be about NZD 70 million. Growth capital expenditure is picking up with the commitment to build the Turitea wind farm. Other growth investments are possible. Management is committed to paying dividends based on a payout ratio of 70%-85% of free cash flow, but the potential for further special dividends has diminished because of increased growth expenditure. Should the firm have surplus free cash flows after funding growth projects, it might opt for share buybacks.

Bulls Say: 

  • Mercury is a low-cost provider of electricity attributed to its significant renewable assets.
  • The company has a strong retail electricity brand, especially in the key Auckland region.
  • A strong free cash flow is expected to support dividend growth and investment in Tilt Renewables and other growth opportunities.

Company Description: 

Mercury NZ (formerly Mighty River Power) generates more than 15% of New Zealand’s electricity and is one of the four major electricity generators and suppliers in the country. All electricity is now generated from renewable sources, which makes it one of the lowest-cost providers of electricity. The company operates nine hydro stations and five geothermal power plants, all located in the North Island. Mercury sells electricity to residential and commercial customers and has the largest share of the key Auckland market.

(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

FVEs for Anglo American, BHP, and Glencore Modestly Reduced as Queensland Hikes Coal Royalty Rates.

Business Strategy & Outlook

BHP Group is the world’s largest publicly traded mining conglomerate and positioned at the centre of the China boom. The company correctly values a strong balance sheet to provide some stability through the inevitable cycles and derives some modest benefit from commodity and geographic diversification, relative to its mining peers. BHP produces a range of commodities and is a major producer of iron ore, copper, and metallurgical coal. Exposure to conventional oil and gas ended with the spinoff and subsequent merger with Woodside in 2022. The onshore U.S. shale assets were divested in 2018. Much of the company’s operations are in Australia, particularly the low cost iron ore business. Many of BHP’s assets are located close to key Asian markets, particularly iron ore and metallurgical coal, which provides a modest freight cost advantage relative to peers. 

Commodity demand is tied to global economic growth, China in particular. China is BHP’s largest customer, accounting for more than 65% of total sales in fiscal 2021. With demand for most products likely to soften with the end of the China boom, and BHP’s fiscal 2021-22 earnings back near the fiscal 2011-12 peak, the outlook is for earnings to materially decline, with iron ore the likely key driver. The good times saw significant capital expenditure, notably on iron ore and onshore U.S. shale gas and oil. Overinvestment in the boom diluted returns to the point where long-term excess returns are unlikely. Structurally lower earnings with the demise of the China boom peaks means midcycle returns on adjusted invested capital, after adding back the impairments and write-downs,are anticipated to be close to the cost of capital. Ignoring the cumulative impairments and write-downs, returns are forecasted to modestly excess the cost of capital by mid cycle.

Financial Strengths 

BHP is in a strong financial position. With ongoing debt repayment, modest near-term capital requirements and the fortuitous bounce in commodity prices since 2016, BHP’s financial position is strong. For the five years ended fiscal 2026, net debt/EBITDA is expected to remain below 0.5 and EBIT/net interest to average more than 30. Net debt at end-June 2021 was about USD 4 billion, below BHP’s net debt target range of USD 12 billion to USD 17 billion. Given the limited capital expenditure requirements, with only modest commitments to new expenditure in the lower demand growth environment, BHP’s balance sheet is expected to remain strong with excess cash flow to be returned to shareholders. Share buybacks and special dividends are possible, depending on the level of commodity prices, given the relatively modest outlook for capital expenditure. The likelihood of special dividends and buybacks would decline if BHP chose to pursue acquisitions.

Bulls Say

  • BHP is a beneficiary of continued global economic growth and demand for the commodities it produces. 
  • The company’s cash flow base is diversified and is less susceptible to the vagaries of the market than single-commodity producers. 
  • BHP’s iron ore assets are industry-leading. The company remains well placed to continue low-cost production and increase output with minimal expenditure and an efficiency focus.

Company Description

BHP is a leading global diversified miner supplying iron ore, copper, oil, gas, and metallurgical. The merger of BHP Limited (now BHP Ltd.) and Billiton PLC (now BHP PLC) created the present-day BHP. Shareholders in each company have equivalent economic and voting rights in BHP as a whole and in 2022 voted to reunify the dual listed structure. Major assets include Pilbara iron ore, Queensland coking coal, Escondida copper and conventional petroleum assets, principally in Australia and the Gulf of Mexico. Onshore U.S. oil and gas assets were sold in 2018 and the remaining Petroleum assets are likely to be spun off and merged with Woodside.

(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

Winnebago’s Backlog Remains High due to Demand Resetting Higher After the Pandemic

Business Strategy & Outlook:   

Winnebago, which reinvented itself under CEO Mike Happe with the November 2016 acquisition of high-end towable maker Grand Design, sees itself as a leading outdoor lifestyle firm. It now has a marine segment with Chris-Craft and Barletta. Towable is an area the company had long wanted to grow in but had remained very small since acquiring SunnyBrook in 2011. Winnebago’s North American towable share is 12%, up from under 2% before Grand Design, so a long growth runway is forecasted if it can keep chipping into Thor’s and Forest River’s roughly 80% combined share. In fiscal 2021, towable were about 55% of total revenue compared with just 9% in fiscal 2016. High brand equity enabling scale and barriers to entry provide Winnebago with a narrow economic moat. 

Leadership sees opportunities to improve Winnebago’s operations with an intense focus on strategic planning to be faster to market with new products in new segments such as off-roading and lower price points (but not the cheapest in a segment). Models are no longer cloned, which should help dealer profitability, and product will be positioned around a good, better, best framework. A unit is now not manufactured until it has an order, which should mean little to no discounting. Acquisitions in the $700 billion-plus outdoor activity market also play a role, but only for high-end firms such as Grand Design, Chris-Craft, Newmar, and Barletta. Industry data shows that 11.2 million U.S. households owned a RV in 2020, up from 6.9 million in 2001. 60% of first-time campers are under age 40 and have a household income of $100,000 or more versus 29% for all campers. 82% of new campers since the pandemic have children and Hispanic and Black consumers were 25% of all campers in 2020, up from 8% in 2012, so Winnebago has plenty of runway with a wide consumer base if it executes right. Winnebago’s brand equity gives it a good shot at capitalizing on these trends. The pandemic-induced outdoor lifestyle boom has also given the company a $3.6 billion RV backlog at third quarter fiscal 2022, up from about $400 million at the end of fiscal 2019.

Financial Strengths:  

The balance sheet lacks the massive legacy costs that burden some other manufacturers because Winnebago’s workforce is not unionized. Winnebago’s untapped $192.5 million credit line, good through Oct. 22, 2024, coupled with about $238 million of cash should, get the firm through nearly any challenge. A 9% increase in the dividend in summer 2020, despite the pandemic at the time, is a good sign of financial health, as is a 50% increase announced in August 2021. Winnebago’s balance sheet had been free of long-term debt since the mid-1990s. Having no debt limits the downside to equity investors, but new leadership was exploring whether to add debt and did so in fiscal 2017 with $353 million to fund part of the consideration to buy Grand Design. Debt as of May 28 totaled $600 million, before a $49.1 million convertible note discount and $9.4 million of debt issuance costs, and consists of $300 million of 1.5% 2025 unsecured senior convertible notes issued to buy Newmar (along with the company issuing 2 million shares of stock to the seller at $46.29) and $300 million of 2028 6.25% senior secured bonds. The convertible notes are not callable, can be converted any time starting Oct. 1, 2024, and have a conversion price of $63.73 per share. The target range for net debt/adjusted EBITDA is 0.9-1.5 times, but management is willing to leverage up to 3.0 times to make an acquisition. Net debt/adjusted EBITDA was 0.6 times at the end of third quarter fiscal 2022. Winnebago has no significant pension obligations and stopped paying retiree healthcare in 2017. Winnebago expects to be comfortably free cash flow positive in the long term. Company would prefer that it repurchase its shares only when they’re cheap and buybacks be done at a minimum to offset dilution from stock option issuance. Acquisitions and other growth investments are a priority over buybacks.

Bulls Say: 

  • The Grand Design acquisition materially raised Winnebago’s operating margin, and Newmar could do the same. 
  • The company’s strong balance sheet provides financial strength and flexibility to withstand cyclical downturns.
  • Because RV consumers are relatively affluent, rising gas prices would probably not hinder a consumer’s ability to purchase a motor home. A 2016 study by travel consulting firm PKF Consulting found that for a family of four, gas prices would have to exceed $12 a gallon to make RV travel more expensive than other forms of travel.

Company Description: 

Winnebago Industries manufactures Class A, B, and C motor homes along with towable, customized specialty vehicles, boats, and parts. Headquartered in Eden Prairie, Minnesota, Winnebago has been producing recreational vehicles since 1958. Revenue was about $3.6 billion in fiscal 2021. Winnebago expanded into towable in 2011 with the acquisition of SunnyBrook and acquired Grand Design in November 2016. Towable made up 85% of the firm’s RV unit volume, up from 31% in fiscal 2016. The company’s total RV unit volume was 71,015 in fiscal 2021. Winnebago expanded into boating in 2018 with the purchase of Chris-Craft, bought premium motor home maker Newmar in November 2019, and bought Barletta pontoon boats in August 2021.

(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

SQM had increased its market share to 35% by the end of 2017 through a volume-over-price strategy

Business Strategy and Outlook 

Through its access to high-quality mineral deposits, Sociedad Quimica y Minera de Chile is a large, low-cost producer of lithium, iodine, and nitrates used in specialty fertilizers. SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets. SQM’s low-cost lithium deposit in the Salar de Atacama boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert. As electric vehicle penetration increases, it is expected high-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities. SQM is a major supplier in the lithium carbonate market. Long term, the company plans to expand its carbonate capacity to at least 250,000 metric tons from 70,000 in 2019. SQM is also investing in lithium hydroxide production capacity in Australia through a joint venture with Wesfarmers, Covalent Lithium, which will be a fully integrated spodumene-based lithium hydroxide producer. The first part of the project is to enter production in the mid-2020s, with a capacity expansion in the second half of the decade. Unit costs should sit on the lower half of the lithium hydroxide cost curve.

SQM is a market leader in potassium nitrate, a specialty fertilizer used in high-value crops, including fruits and vegetables. Specialty potash demand should benefit from the shift in emerging-market diets to higher-value foods. While specialty fertilizer prices tend to move in line with commodity potash prices, they have been less affected by movements in commodity potash prices. SQM is also a small player in commodity potash. SQM is the world’s largest producer of iodine, used in X-ray contrast media, pharmaceuticals, and LCD films. Iodine demand has grown 3% annually over the past decade and should continue to grow at this pace as healthcare spending rises with aging populations. SQM had increased its market share to 35% by the end of 2017 through a volume-over-price strategy, which caused iodine prices to fall. After higher-cost supply reduced production and SQM achieved its market share goals, the company is now acting as a rational player and prices have increased since 2018.

Financial Strength

SQM is in excellent financial health. As of March 31, 2022, cash and cash equivalents, including current financial assets, stood at $3.3 billion, which exceed the company’s total debt ($2.6 billion). SQM’s debt position has grown in recent years as the company is in the midst of quadrupling its Chilean lithium capacity, funding development of its Australian lithium joint venture project, and expanding its fertilizer and iodine production capacities. The company plans to spend over $2 billion in capital expenditures from 2021 to 2024 to support these growth initiatives. To help fund these investments, the company issued $1.1 billion in equity in early 2021. However, given the recent rise in lithium, fertilizer, and iodine prices, SQM will be able to pay for the remaining capital expenditures with cash generated from its operations. Ultimately, the company’s balance sheet is to remain healthy as profits grow from the increased volumes and higher lithium prices. SQM’s dividend varies each year. It is calculated as a percentage of net income that ranges between 50% and 100% depending on balance sheet metrics, including total current assets divided by total current financial liabilities and total liabilities minus current financial assets divided by total equity. While SQM’s dividend will fluctuate from year to year, the company will generate enough cash flow to meet all of its financial obligations, including dividends.

Bulls Say’s

  • SQM’s crown jewel is its Salar de Atacama operation in Chile, which is the lowest-cost lithium deposit globally. Its capacity expansions at this resource should create long-term value. 
  • The company’s specialty fertilizer blends of potassium, nitrates, and sodium garner a premium to commodity fertilizers due to their use in high-value crops, including fruits and vegetables. 
  • Lithium prices will remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and return on invested capital for SQM.

Company Profile 

Sociedad Quimica y Minera de Chile is a Chilean commodities producer with significant operations in lithium (primarily used in batteries for electric vehicles and energy storage systems), specialty and standard potassium fertilizers, iodine (primarily used in X-ray contrast media), and solar salts. The company extracts these materials through its high-quality caliche ore and salt brine deposits. SQM is also developing a hard rock lithium project in Australia.

(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 Trading Ideas & Charts

Littelfuse is a differentiated supplier of electrical protection into cars and industrial applications.

Business Strategy & Outlook

Lithium Americas aims to become a low-cost pure-play lithium producer. The company has no current lithium sales volumes but is developing three resources that should eventually enter production, with the first project to enter production by the end of 2022. Cauchari-Olaroz and Pastos Grandes are brine resources located in northwestern Argentina. Thacker Pass is the company’s clay resource in the U.S. state of Nevada. As electric vehicle adoption increases, the maintained double-digit annual growth for lithium demand. Lithium Americas should benefit as there should be more than enough demand for company’s three resources to enter production and expand capacity over time.

At Cauchari-Olaroz, Lithium Americas owns 44.8% of the project, while Ganfeng, one of the world’s largest lithium producers, owns 46.7%. The remaining 8.5% stake is owned by JEMSE, an Argentina state-owned mining company. Once Cauchari-Olaroz enters production and begins ramping up volumes, the project should have a similar cost position as other Argentinean brines, such as the resources of narrow-moat Livent and Orocobre. The project plans to bring an initial 40,000 metric tons of capacity later this year, with plans for additional expansions. LAC owns 100% of the Pastos Grandes project. Located close to the Cauchari-Olaroz project in Argentina, Pastos Grandes is currently under development. The project aims to produce 24,000 metric tons per year. LAC also owns 100% of the Thacker Pass resource. The project faces legal opposition from environmental groups that could cause delays, however, the project will eventually enter production. Thacker Pass would be the first clay-based lithium resource to enter production globally. Currently, all lithium is produced from either brine (primarily in South America) or hard rock mining that produces spodumene (primarily in Australia) Thacker Pass plans on bringing on an initial 40,000 metric tons of capacity, with additional expansion plans.

Financial Strengths

Lithium Americas is in a solid financial position. As of March 31, Lithium Americas had $290 million in total debt and $492 million in cash on its balance sheet. While debt levels remain low, Lithium Americas will need to contribute nearly $67 million for its share of capital expenditures to finish construction of the Cauchari-Olaroz project. However, the company has sufficient cash to manage these payments. Lithium Americas can also access $75 million in undrawn cash from its loan and credit facilities. LAC has refinanced its construction facility into convertible long-term debt. With a conversion rate of $47.10 per share, which is slightly above the value estimate, the financing term as favorable for existing shareholders. As Cauchari-Olaroz enters production in 2022, the project should begin to generate positive cash flows in subsequent years, allowing the project to fund capacity expansions. LAC should also be able to use some of its share of profits to invest in the construction of the Thacker Pass project. Management is exploring bringing in a partner on the project and applied to secure low-cost debt financing from the U.S. Department of Energy for 50% to 60% of the Phase 1 capital expenditures. If the company decides to remain the sole owner of the project and secures low-cost debt, it could be funded through equity issuances. As LAC progresses on developing the Pastos Grandes project, the company will likely have to issue additional equity or debt, or find a partner, in order to fund construction. In February, LAC announced the company is considering a separation into two companies, with assets divided based on geography. One company would hold the Argentina-based Cauchari-Olaroz and Pastos Grandes assets. The other company would hold the U.S.-based Thacker Pass assets. 

Bulls Say

  • Through the ownership of three large lithium resources, Lithium Americas should be able to enter the lithium industry and become a major producer globally with one of the lowest-cost lithium carbonate resources and one of the largest rock-based resources globally. 
  • As a lithium pure play, Lithium Americas is well positioned to increase profits from EV growth through lithium batteries. 
  • Lithium prices will remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and return on invested capital for Lithium Americas.

Company Description

Lithium Americas is developing three lithium production assets, two brine resources located in northwestern Argentina and a clay resource in Nevada, U.S. While the company has no current lithium production, the first Argentina resource, Cauchari-Olaroz, to enter production in late 2022. The Nevada project, Thacker Pass, to enter production in the middle of the 2020s and the second brine resource, Pastos Grandes, to enter production in the late-2020s. Lithium Americas plans for all three resources to be fully integrated, selling into the lithium chemical market. The company is also exploring separating into two companies, with assets divided by geography, an Argentina company and a U.S. company.

(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
Shares Small Cap

The Fast Charge EV Network: Initiating Coverage of EVgo with $7 Fair Value Estimate

20025825 - closeup image of businessman drawing 3d graphics

Business Strategy & Outlook:  

EVgo is a leading owner operator of fast charging direct current, or DC, stations in the United States. The market for public charging of electric vehicles can be divided into high-powered DC charging and lower powered Level 2, alternating current (AC), charging. Charging times to add 100 miles vary from as little as 5-15 minutes with DC charging to as much as several hours with AC charging. EVgo was a pioneer in the buildout of DC charging, which is expected to experience a growing percentage of charging demand. According to Bloomberg NEF, fast charging is expected to constitute 22% of all public EV demand by 2030 versus less than 10% in 2021.

EVgo pursues various partnerships to execute its business model. The company partners with retail, grocery stores, and related high-traffic merchants to site its charging stations in desirable locations. This strategy differs from other DC charging strategies which focus more on highway corridor locations. In addition to host customer partnerships, EVgo has partnered with automotive OEMs. One example is with General Motors, which has agreed to help fund EVgo’s buildout of DC charging stations over the next few years. Auto OEM partnerships is viewed as a key customer acquisition strategy for EVgo and would view further partnerships favorably for its competitive position. While public charging for passenger vehicles has historically been EVgo’s focus, and an increasing focus on the fleet market. Vehicle fleets are particularly relevant for DC charging given the higher utilization of the vehicle compared to a typical passenger car. While the long-term attractiveness of the fleet market, and the number of competitors is numerous in this burgeoning arena. In addition to its core focus of owning and operating DC fast chargers, EVgo expanded its digital and software capabilities with its acquisition of Plugshare in 2021. Plugshare is the leading global platform for EV drivers to locate and provide information relating to charging stations. This transaction is viewed as financially immaterial, but highly strategic given its large data capture.

Financial Strengths:  

EVgo’s financial strength received a major boost from its 2021 special purpose acquisition company merger. The merger and subsequent financing added approximately $600 million in cash to EVgo’s balance sheet. This allows for a step change in EVgo’s capital investment compared with a more restrained balance sheet under past private equity ownership. While EVgo possess a relatively strong balance sheet compared to EV charging pure plays, it pales in comparison to select competitors within auto OEMs, utilities, or oil and gas majors. EVgo’s balance sheet is unlevered, which is viewed as prudent given the early stage of its business. Over time, the envision leverage being added as the business matures given its asset-backed nature. EVgo’s asset ownership approach results in a more capital-intensive business model than competing models. The uses of cash to consist operating cash outflows as profitability is not expected in the near-term and growth capital expenditures associated with expanding its fast-charging network. Government subsidies play a crucial role in financing of EV charging stations – helping to offset upfront capital requirements. EVgo notes subsidies can range from 5-50% of typical capital requirements.

Bulls Say: 

  • EVgo is a leading asset owner of fast-charging stations, which are expected to grow faster than slower charge stations.
  • Government subsidies can help fund a material portion of a typical EV charging station’s capital expenditures.
  • EVgo offers exposure to growing adoption of electric vehicles.

Company Description: 

EVgo owns and operates a public direct current fast charging network in the U.S. EVgo’s network of charging stations provides electric vehicle charging infrastructure to consumers and businesses. Its network is capable of charging all EV models and charging standards currently available in the U.S. EVgo partners with national and regional chains of grocery stores, automotive original equipment manufacturers (OEMs), hotels, shopping centers, gas stations, parking lot operators, local governments and independent property owners in order to locate and deploy its EV charging infrastructure.

(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

Spark’s High Dividends can be Maintained

Business Strategy & Outlook:   

Spark New Zealand generates dependable cash flow, has a strong position in the New Zealand telecom market, and has the infrastructure to offer a diverse range of products. Although competition has been intense in the New Zealand telecommunications market, Spark’s scale provides a competitive advantage. Furthermore, private equity ownership of Vodafone New Zealand has heralded in a new age of rational competitive behavior in mobile. Construction of an ultrafast broadband network will lower barriers to entry in fixed-line and broadband, and represents a risk to Spark’s broadband business. Successful execution of product bundling that leverages the mobile network could help defend broadband market share, as will continuing growth in fixed wireless broadband. 

Spark’s moat is supported by cost advantage and economies of scale in a relatively small market. Spark is the equal-largest player in mobile with over 40% revenue market share. The dominant market positions of Spark and Vodafone may make it difficult for new players to enter the market and establish necessary scale. With its price-focused strategy, 2degrees, the third player in the mobile market, has gained some traction, although it is financially constrained under private ownership. Given the small New Zealand market, there is a low risk that a new player will enter as an infrastructure network operator. Any new players may adopt a wholesale access mobile virtual network operator model, selling mobile services using the infrastructure of another network. Spark captures part of the revenue by wholesaling its infrastructure to MVNOs, and recently launched its skinny service to compete in the value-end of the broadband market. Other operations in IT services, managed data, and international fibre are supportive. This includes cloud computing services and international connections offered to corporate and government entities.

Financial Strengths:  

Spark New Zealand is comfortably geared. Net debt/EBITDA before investment income as at the end of December 2021 was 1.2 times. Reliable free cash flow means that operations, maintenance capital expenditure, and investment can be largely funded by cash flow. Spark New Zealand’s capital structure is maintainable in its current form. The company aims to maintain an external credit rating in the A band, with the goal of keeping net debt/EBITDA below the internal threshold of 1.4 times. Spark New Zealand’s metrics to remain in line over the long term.

Bulls Say:  

  • Spark New Zealand is the largest telecom provider in New Zealand, where it provides the most diverse range of telecommunications services. These characteristics provide reasonable diversity and will allow the company to execute a product-bundling strategy.
  • Spark New Zealand has a high-quality mobile network and has secured the greatest capacity in recent spectrum auctions. These attributes provide a valuable competitive advantage in the New Zealand market.
  • Free cash flow generation is strong, despite ongoing requirements to invest in networks, technology, and spectrum.

Company Description:  

Spark is one of only two large integrated telecommunications companies in New Zealand. It is the dominant provider of fixed-line services in the country and effectively equal-number-one player in the mobile telephony market. It also boasts a commanding presence in the New Zealand corporate and wholesale telecommunications services provision space. Spark’s operations are split into mobile, voice, broadband, and digital-related 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

Okta Remains Attractive Even as We Lower Our Long-Term Profitability Assumptions; FVE to $193

Business Strategy & Outlook

Enabling access management and protecting networks from malicious actors based upon identity credentials are cornerstones of cybersecurity, and the dissipation of a distinct security perimeter could make security teams further rely on user-based cybersecurity. Okta’s cloud-based identity access solutions upended the prevailing methodology of protecting users and providing access to digital resources based upon on-premises products. Okta’s innovative solutions for user access and security will provide it with a durable presence, and strong revenue growth is forecasted alongside significant margin expansion. 

Okta addresses two primary markets through its workforce identity and customer identity products. Workforce identity affords protection and allows access for a customer’s employees, contractors, and partners, while customer identity is for enabling a customer’s customers. Okta melded these two distinct markets within its identity cloud, and has a robust integration network that simplifies identity access and security protocols for the applications its customers rely on. Okta’s solutions are anticipated to be in high demand due to entities desiring a seamless experience for its employees and customers when accessing requested applications, while also ensuring that networks are protected. Always-connected distributed workforces are increasingly using more cloud-based resources, which amplifies the complexity of cybersecurity. Okta’s network of application integrations provide it with a unique selling proposition in that entities can holistically provide identity access across their cloud-based and on-premises applications in a manageable fashion. Alongside a rapidly expanding customer base and gaining more clients with larger deals, Okta is migrating upstream to land more enterprise clients and expanding internationally. The company has become a favorable partner with large system integrators, which are expected to help its growth plan with large customers undergoing digital transformation and market expansion efforts.

Financial Strengths

Okta is a financially sound company that is expected to generate strong free cash flow while expanding its operating margin profile. The company has historically operated at a loss, and Okta can become profitable by fiscal 2026 on an adjusted basis. Okta’s financial plan is viewed in line with a land-and-expand strategy, whereby Okta initially has elevated sales and marketing to gain a customer cohort before expanding its revenue per customer while lowering its operating costs per customer (on a revenue percentage basis). Okta can benefit from cross-selling and up-selling tangential products while developing a stickier customer base by further penetrating the enterprise and government markets. At the end of fiscal 2022, Okta had $2.5 billion in cash and cash equivalents, $16 million of 2023 convertible senior notes, and $1.8 billion of 2025 and 2026 convertible senior notes. The 2023 notes have a 0.25% fixed interest rate per year and have an initial conversion price of about $48.26. The 2025 notes have a 0.125% fixed interest rate per year and have an initial conversion price of about $188.71. The 2026 notes have a 0.375% fixed interest rate per year with an initial conversion price around $236.80. Okta uses note hedges, warrants, and capped calls to alleviate the effects of senior notes converting.

Bulls Say

  • Okta’s novel cloud-based approach for identity access management should continue to attract new customers while margin expansion comes from prolific revenue growth outpacing expenses. 
  • The independence of its integration network can make Okta a favorable choice for customers using resources across public clouds, private clouds, and on-premises. 
  • As Okta moves upstream, it can land higher-value deals with larger, stickier customers. Additionally, ample cross-selling and up-selling opportunities exist between Okta’s workforce identity and customer identity products.

Company Description

Okta sells solutions for identity and access management. Its workforce offerings contain products to protect and enable employees, contractors, and partners, while customer identity and access products securely enable an organizations’ customers to use applications. Okta’s software solutions are cloud-delivered, and its integration network gives customers security protection and access across a wide variety of applications that are critical to business and government needs. The California-based company went public in 2017.

(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

Alibaba Cloud Continues To Be The Leader In Terms Of Market Share In China And Stands To Benefit From Digitization Of Industries

Investment Thesis:

  • Strong existing consumer base (1.31 billion global active transacting users as of FY22) which is continuing to grow strongly.
  • Growing incremental market share in China’s e-commerce pie which is being captured by strategic vertical expansions. 
  • International expansion across both developed and emerging markets.
  • Supportive long-term macroeconomic tailwinds in real wage growth, healthier balance sheets, and accessible consumer credit.
  • Potential corporate activity.
  • Reliable and competent management team.

Key Risks:

  • Expansion into new verticals disappoints management and market expectations.
  • Increasing competition impacts BABA growth rates and key trading metrics (e.g. daily active users).
  • Contracting margins as entry into offline-retail markets is met with fierce competition from incumbents (e.g., Tencent-backed Meituan in food delivery).
  • Key person risk – Jack Ma has been the face of BABA and retirement from the board may be viewed as negative.
  • Geopolitical tensions hurt trade relations between China and key partners.
  • Significant data breach or increase rules/regulations around consumer data privacy leading to increased costs.
  • Regulatory risks (Chinese government imposing restrictions or additional tax burdens on companies like BABA and antitrust policies). 

Key highlights:

  • BABA reported mixed FY22 results with revenue of RMB853.1bn, beating consensus estimate of RMB850.2bn, however, diluted EPS of RMB2.84 was well below expectations of RMB26.3.
  • Though year-on-year (y/y) revenue growth moderated during the year with the segment earning revenue (after inter-segment elimination) of RMB74,568m, up +23% y/y 
  • The segment delivered its first profitable year, with adjusted EBITA of RMB1,146m compared to a loss of RMB2,251m in pcp.
  • The Company repurchased ~60m of ADSs for $9.6bn during the year and the Board authorized an increase of share repurchase program by +66.7% to $25bn with 2.7bn ADSs (21.4bn ordinary shares) remaining outstanding.
  • The combined AACs (after deduplication) of consumer-facing businesses in China reached a historic milestone of over 1 billion during the year, up +13% y/y
  • Revenue increased +19% to RMB853,062m, primarily driven by +18% growth in China commerce, +23% increase in Cloud and International commerce increasing +25%. Adjusted EBITA, a non- GAAP measurement, declined -23% to RMB130,397m.
  • Net cash provided by operating activities declined -38% to RMB142,759m and FCF was RMB98,874m, a decline of -43%.

Company Description: 

Alibaba Group Holding Ltd is a multinational Chinese retailer, specializing in e-commerce, infrastructure, and internet content services through its numerous subsidiaries. Additionally, the Company also owns a 33% equity stake in Ant Financial (now formally known as Alipay) which offers payment and financial services for consumers that operate on Alibaba platforms. The Company’s businesses consist of core commerce, cloud computing, mobile media and entertainment, and other innovation initiatives. Through investee affiliates, it also participates in the logistics and local services sectors. 

(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

Walgreens Faces Covid Headwinds and continues to push into Primary-Care Services

Business Strategy & Outlook:
Founded in 1901, Walgreens Boots Alliance is a leading global retail pharmacy chain. In fiscal 2021, the company generated approximately $133 billion in revenue and dispensed over a billion prescriptions annually, representing just under one fourth of the U.S. drug market. The firm’s nearly 9,000 domestic stores are strategically located in high-traffic areas and generate over $13 million per store, which drives scale and remains a critical consideration in an increasingly competitive market that has witnessed rationalization. The core business is centered on the pharmacy, which accounts for about three fourths of revenue and is considered the main driver of traffic. Despite Walgreens’ scale as a leading purchaser of prescription drugs and competitive advantage over smaller retail pharmacy chains, gross margins have come under pressure in recent years as a result of pharmacy benefit managers’ negotiating leverage and market power. These pressures have affected margins across the entire retail pharmacy industry, pushing the largest players (Walgreens, CVS, Walmart) to branch into other healthcare services.

Walgreens has been focused on leveraging scale to foster strategic partnerships to increase traffic and cross-selling opportunities, with a long-term focus to improve human health in general. While Walgreens has expanded into omnichannel offerings, but its high-traffic brick-and-mortar locations and convenience-oriented approach are less susceptible to pressures from e-commerce and mass merchandisers, particularly in the health and wellness categories, than other retailers. Historically, the company’s strategy was based on footprint expansion, but having established a scalable infrastructure, the focus has evolved and the concentration has shifted to improving store utilization and strategically aligning with healthcare partners to address the macro trend of localized community healthcare. The company’s partnership with VillageMD to establish primary-care clinics in select Walgreens locations further establishes the drugstore as a one-stop shop for care.

Financial Strengths:
As of March 2022, cash and equivalents stood at $2 billion, or lower than the company’s $4 billion in combined current debt and lease obligations. Beyond those current obligations, Walgreens owes $11 billion in long-term debt and $22 billion in operating lease obligations. The company continues to focus on its core assets and expanding in primary-care services. While cash levels appear low, the firm will be able to rebuild its cash balance through the normal course of business and free cash flow generation. For example, free cash flow generation was around $4 billion in fiscal 2021, and only slightly lower cash flows going forward even after pandemic conditions ease.

Bulls Say:
As a leading retail pharmacy with around 9,000 domestic locations, Walgreens is able to reach 80% of U.S. consumers.
Strategic partnerships focused on increasing store utilization through the addition of clinical partners to localize community healthcare should be a natural extension in providing coordinated care that will increase community engagement and offset reimbursement pressures.
An increase in higher-margin health and beauty merchandise sales bolsters front-end store performance.

Company Description:
Walgreens Boots Alliance is a leading retail pharmacy chain with about 13,000 stores in the U.S. and internationally. Walgreens’ core strategy involves brick-and-mortar retail pharmacy locations in high-traffic areas, with nearly 80% of the U.S. population living within 5 miles of a store. Currently, the company has a leading share of the domestic prescription drug market at about 20%. In 2021, the company sold a majority of its Alliance Healthcare wholesale business to AmerisourceBergen for $6.5 billion, doubling down on its core pharmacy efforts and ventures in strategic growth areas in primary care (VillageMD) and digital offerings. The company also has equity stakes in AmerisourceBergen (29%) and Sinopharm Holding Guoda Drugstore (40%).

(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.
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