Tag: US Market

Business Strategy & Outlook

The Estee Lauder has earned a wide moat, based on its valuable portfolio of global leading brands, its preferred status with its channel partners in department stores, specialty beauty outlets, travel retail locations, and a scale-based cost advantage.

Although the pandemic is presenting challenges for Estee and its peers, one can be optimistic about its competitive position and long-term strategy. Estee has made significant investments in omnichannel, marketing, and innovations that are helping the firm recover briskly from the pandemic and the subsequent inflation and supply chain disruptions. The firm’s growth opportunities should persist over the long term as emerging markets (a third of sales) still spend significantly less than developed markets on prestige beauty. Per Euromonitor, average annual per capita spend on prestige beauty in 2021 was $104 in the U.S., $114 in South Korea, $22 in China, $6 in Brazil, and $1 in India. Estee also has significant opportunity to expand its brands geographically. This opportunity is particularly pronounced in the context of its brand reach, as nearly all of its 30 brands are sold in the U.S., but only 15 have launched in China, 10 in India, and nine in Brazil. 

Despite its solid competitive standing, Estee isn’t immune to headwinds. Even prior to COVID-19, Estee had been struggling with its large exposure to global department stores  as the channel faces declining traffic from consumers shifting their purchases to other outlets. However, the firm has been proactively diversifying its channel reach, developing a strong presence in e-commerce (28% of sales) and specialty beauty. In the next few years, Estee will accelerate these efforts with the implementation of its post-COVID-19 business acceleration plan. This will result in the closure of 10%-15% of freestanding stores and some unproductive department store counters, elimination of 3.5% of jobs, and realigning of the distribution network, resulting in annual savings of $300 million-$400 million, a portion of which will be reinvested in e-commerce, omnichannel, and digital marketing capabilities.

Financial Strengths

Estee Lauder has traditionally carried a very low level of debt. Net debt to adjusted EBITDA has consistently remained less than one (averaging 0.2 times over the past 10 years), and this metric to remain low, with Estee holding more cash than debt on average over the next five years. As such, EBITDA interest coverage has been more than sufficient, averaging 16 times over the past three years, and to average 31 times over the next five years. The Estee has ample liquidity to weather disruptions from the pandemic and its aftershocks, with $6.3 billion in cash and available liquidity as of March. The firm’s stated and demonstrated priorities for its robust generation of free cash flow to the firm (midteen percentage of sales over the 10-year forecast, versus high single digits on average the past three years due to the pandemic) are to invest in organic growth, acquire compelling businesses should the opportunity arise, and return cash to shareholders. The Estee to average 4%-5% of revenue toward capital expenditures each year, in line with historical averages. In an effort to conserve cash during the pandemic, Estee suspended the June 2020 dividend (which conserved $170 million), reinstated it the following quarter at the previous $0.48, and has since increased it to $0.60. Over the long term, dividends will grow 13% annually, generally in line with earnings growth, maintaining a 30%-40% payout ratio. No one can modeling unannounced acquisitions as the timing and magnitude is very difficult to predict. Instead, the model excess cash is used to repurchase shares (1%-2% of outstanding shares annually, or about $1.5 billion-$2.5 billion, about double the average directed toward buybacks each year since fiscal 2015), which as prudent when shares trade below the assessment of its intrinsic val

Bulls Say

• The firm has many available levers for growth, given the rise of the global middle class, China’s beauty consumption expanding from skincare into makeup, fragrance and haircare, and geographic expansion opportunities for the firm’s portfolio of strong brands.

• Estee Lauder, as a prestige beauty pure play, is best positioned to benefit from consumers trading up from mass to prestige, which is occurring across the globe.

• Estee Lauder is aggressively investing in the more profitable e-commerce channel, adapting to evolving consumer preferences, while simultaneously enhancing its margins

Company Description

Estee Lauder is the world leader in the global prestige beauty market, participating across skincare (59% of fiscal 2021 sales), makeup (26%), fragrance (12%), and haircare (3%) categories, with popular brands such as Estee Lauder, Clinique, MAC, La Mer, Jo Malone, Aveda, Bobbi Brown, Too Faced, Origins, Dr. Jart+, and The Ordinary. The firm operates in 150 countries, with 23% of fiscal 2021 revenue stemming from the Americas, 43% from Europe, the Middle East and Africa, and 34% from Asia-Pacific. The company sells its products through department stores, travel retail, multibrand specialty beauty stores, brand-dedicated freestanding stores, e-commerce, salons/spas, and perfumeries.

(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.

Business Strategy and Outlook

No-moat MGM Resorts is facing material near-term headwinds from China’s zero-tolerance COVID-19 policy as well as elevated operational risk in Macao from government oversight of VIP play. Still, MGM has a healthy liquidity profile to see it through this turmoil and remains positioned for the attractive long-term growth opportunities in Macao (22% of prepandemic 2019 EBITDAR), U.S. sports betting, and Japan (accounting for an estimated 10% of 2027 EBITDAR, the first year of likely operation). It can be seen a solid Macao industry visitation over the next 10 years, as key infrastructure projects that alleviate Macao’s congested traffic (Pac On terminal expansion and Hong Kong Bridge in 2018, light-rail transit at the end of 2019, and reclaimed land in 2020-25) come on line, which will expand the region’s constrained carrying capacity and add attractions, thereby driving higher visitation and spending levels. As MGM holds one of only six gaming licenses, it stands to benefit from this growth. Further, MGM Resorts has expanded its room share in Macao to 8% from 3% with its Cotai property, which opened in February 2018. That said, the Macao market is highly regulated, and as a result, the pace and timing of growth are at the discretion of the government.

In the U.S. (78% of prepandemic 2019 EBITDA), MGM’s casinos are positioned to benefit from a multi-billion-dollar sports betting market, generating an estimated mid-single-digit percentage of the company’s 2024 sales. That said, the U.S. doesn’t offer the long-term growth potential or regulatory barriers of Macao; thus, it’s not believed that the region contributes a moat to MGM. Still, there have been very minimal industry supply additions this decade, and this should support solid industry Strip occupancy, which stood at around 90% in prepandemic 2019.

It is expected MGM to be awarded one of only two urban gaming licenses in Japan, with a resort opening in 2027, generating attractive returns on invested capital in the teens.

Financial Strength

MGM entered 2020 in its strongest financial health of the past 10 years. This was illustrated by its 3.7 times debt/adjusted EBITDA in 2019 versus 13 times and 5.7 times in 2010 and 2015, respectively. It was also buoyed by MGM having recently exited an investment cycle, where the company spent $1.6 billion on average annually during 2015-19 to construct and renovate U.S. and Macao resorts versus the $271 million it spent on capital expenditure in 2020. It is believed that MGM has sufficient liquidity to remain a going concern even with zero revenue for a few years. The recent sales of underlying casino assets (such as Bellagio in November 2019, Circus Circus in December 2019, MGM Grand/Mandalay Bay in February 2020, and the scheduled sale of Mirage in 2022) provided it with cash, helping it shore up its liquidity profile. Also, MGM received $4.4 billion in cash for its ownership in MGM Growth Properties, which was acquired by Vici in the first half of 2022. The firm has taken further action to lift its liquidity profile by reining in expenses, tapping its $1.5 billion credit facility (which has since been paid and reissued at $1.675 million), suspending dividends and repurchases (which have since been reinstated), and raising debt. MGM has $1 billion of debt scheduled to mature in 2022.

Bulls Say’s

• It is expected that MGM be awarded one of only two urban Japanese gaming concessions due to its strong experience operating leading resorts in Las Vegas and its successful record of working with partners. 

• MGM is positioned to participate in Macao’s longterm growth opportunity (22% of prepandemic 2019 EBITDAR) and has seen its room share expand (to 8% from 3%) with the opening of its Cotai casino in February 2018. 

• MGM’s U.S. properties are positioned to benefit from the expansion of the multi-billion-dollar domestic sports betting market.

Company Profile 

MGM Resorts is the largest resort operator on the Las Vegas Strip with 35,000 guest rooms and suites, representing about one fourth of all units in the market. The company’s Vegas properties include MGM Grand, Mandalay Bay, Mirage, Luxor, New York-New York, and CityCenter. The Strip contributed approximately 49% of total EBITDAR in the prepandemic year of 2019. MGM also owns U.S. regional assets, which represented 29% of 2019 EBITDAR.It is estimated MGM’s U.S. sports and iGaming operations are currently a mid-single-digit percentage of its total revenue. The company also operates the 56%-owned MGM Macau casinos with a new property that opened on the Cotai Strip in early 2018. Further, also its is expected that MGM will open a resort in Japan in 2027.

(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.

Business Strategy and Outlook

The Revolve Group has carved out an interesting competitive niche in the attainable luxury category, leaning heavily into the strengths of the e-commerce channel–breadth of selection, scalability, and ubiquity of access–to reach a mobile-first, millennial and Gen Z audience across its online properties. With approximately 50,000 stock-keeping units (SKUs) sitting on its Revolve and Forward (luxury) marketplaces at any given time, and with 900 new styles launching weekly, the firm has positioned itself as an “online source for discovery and inspiration,” capturing almost 40% of apparel wallet share among its base of 2.04 million active buyers as of the first quarter of 2022. The firm’s strategy is viewed positively, with an ongoing shift toward mobile and e-commerce channels figuring to provide meaningful growth tailwinds in the near to medium term. Roughly 65% of Revolve’s sales came through mobile devices in 2021, more than double the volume of U.S. e-commerce retail sales in aggregate (35%), while e-commerce penetration continues its inexorable rise in the U.S., seeing apparel category sales approach a 40% online mix in 2021.

Revolve maintains a handful of growth levers that should allow it to capture more than its fair share of industry growth. The addition of beauty, athleisure, and casualwear sales layers, snowballing momentum from the nascent loyalty program, and a growing international business represent the lowest hanging fruit. Growth remains the top priority, with Revolve estimating just 3% penetration among its target demographic in the U.S., and return on advertising spending continues to look alluring. Further, a growing mix of private-label fare should drive moderate near-term gross margin expansion, as the retailer surgically rebuilds inventory around its 24 proprietary brands after pulling back amid pandemic concerns.

Finally, considering management’s openness about its pursuit of a tuck-in brand acquisition, the pursuit of a strong label in underpenetrated offerings like luxury, beauty, or menswear could bolster the firm’s competitive position and help capture incremental wallet share.

Financial Strength

Revolve’s financial strength is assessed as sound. The firm has generated positive operating cash flows in each of the last four years and maintained a $271 million cash and equivalents balance as of the end of the first quarter of 2022. Given the firm’s early stage in its growth cycle, the decision to eschew secured debt and the restrictions it bears is viewed as both prudent and consistent with firms across the coverage in similar stages of their respective lifecycles. With a net cash position and minimal interest cost, management is effectively unencumbered in its pursuit of strategic M&A, internal investment opportunities, and, down the line, shareholder distributions. These opportunities, in the order outlined above, represent the allocative priorities of the firm in the near to medium term.

With a highly cash generative model, averaging 9.5% free cash flow to sales over the next five years, shareholder pressure for distributions is expected to build at approximately the same time that the firm encounters a step-down in sales growth, most likely in the mid-2020s. While the forecast anticipates share repurchases and the initiation of a cash dividend as early as 2023 and 2024, respectively, this horizon could be pushed backwards by a brand acquisition (purportedly high on management’s wish list) and would require an amendment to the outstanding credit facility, in the case of the latter.

As growth slows, the preferable course of action would be for the firm to add leverage to optimize its capital structure and flag modest conflict of interest to that effect – management controls more than 90% of voting power through its Class B shares, and studies suggest that owners tend to assume less than optimal leverage, attributable to a combination of wealth concentration and risk aversion. Any impact on valuation to that effect would fall in the latter half of the decade but remains worth monitoring longer-term.

Bulls Say’s

• Revolve offers attractive exposure to a quickly growing e-commerce apparel segment, representing one of only a handful of profitable pure-play online only stores. 
• Increasing private-label fare should provide a nearterm boost to gross margin performance and can be used to fill holes in the marketplace’s product assortment as the firm continues its category expansion. 
• The loyalty program should see better traction as in person events return, offering an attractive vehicle to gain wallet share and encourage cross-shopping Revolve and Forward marketplace properties. .

Company Profile 

The Revolve Group is an emerging e-commerce retailer, selling women’s dresses, handbags, shoes, beauty products, and incidentals across its marketplace properties, Revolve and Forward. The platform is built to suit the “next generation customer,” emphasizing mobile commerce, influencer marketing, and occupying an aspirational but attainable luxury niche. With $891 million in 2021 sales, the firm sits outside the top 20 apparel retailers (by sales) in the U.S. but has consistently generated top-line growth north of 20%-25% as the industry continues to favor digital channels. The firm generates approximately 20% of sales from private-label offerings, while focusing on building an inventory of unique products from emerging fashion brands with less than $10 million in annual sales.

(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.

Business Strategy & Outlook

 The Hormel’s narrow moat is secured by a strong portfolio of brands with demonstrated pricing power, entrenched retail relationships due to the firm’s number-one and -two positions in several categories, and a position as one of the leading providers of proteins to the food-service industry, differentiating itself by servicing these clients with its own salesforce. The long-term transition from a commodity protein producer to a branded consumer product company has served Hormel well, helping to stabilize prices and demand for its strong brands.

While competitive pressures are unlikely to abate, the firm is working to stabilize its competitive position. Hormel has shifted its mix to include more on-trend fare (Applegate natural and organic meats and cheeses, snacking platforms, Hispanic offerings, and labor-saving products for food service, to name a few). As a key part of its strategy to expand into snacking, Hormel acquired Planters from no-moat Kraft Heinz for $3.4 billion in 2021. While Planters has suffered from underinvestment the past few years, Hormel is funneling additional resources to enhance innovation and marketing, which will help stabilize the brand’s market share. In 2022, Hormel will take another step to reduce its mix of commodity sales from 10%-15% of revenue currently, by 5%-10%. It will shed $350 million (3% of sales) of commodity pork revenue as well as non-value-added turkey sales (to be quantified during the first-quarter report). These efforts, which should enhance profit margins, reduce volatility, and further support Hormel’s competitive edge as its strong brands become a greater portion of the mix. The Hormel has a significant opportunity to expand its businesses internationally, as only 8% of revenue is from outside the United States currently. Spam and Skippy both have international appeal and are being launched globally. Also, the acquisition of Ceratti, a Brazil-based producer of deli products, gives Hormel access to the fast-growing Brazilian market. The Hormel can use this business as a foundation to launch its legacy brands across Latin America.

Financial Strengths

Hormel has a long tradition of a conservatively managed balance sheet, with average debt/adjusted EBITDA of just 0.5 over the last decade compared with the peer average of around 3.0. Therefore, the $3.4 billion Planters acquisition does not strain the balance sheet, taking leverage to a very manageable 2.3 times for fiscal 2021 (and 1.9 times using net debt), falling to below 1 in 2024 and beyond.

Hormel’s free cash flow (cash flow from operations fewer capital expenditures) as a percentage of revenue averaged 7% over the past three years, compared with 10% for its peer set. This metric has increased as the company has focused on shortening its cash-conversion cycle, and to continue to improve to 10% over the next five years. Hormel’s priorities for cash are dividend increases, reinvesting in the business through capital expenditures and acquisitions, and opportunistic share repurchases. The company has an impressive record of increasing dividends consecutively for 56 years and remains committed to maintaining this trend. The forecasted annual dividend increases (averaging a mid-single-digit clip) and expect the company to maintain a 50% payout ratio. While anticipate that the firm will remain a consolidator, No one can include any unannounced future tie-ups given the uncertainty surrounding timing, nature, and terms. Rather, the model that the company engages in share repurchases (forecasting a 1% reduction in shares outstanding on average annually over the next 10 years), spending a view as prudent if completed at a discount to assessment of the firm’s intrinsic value.

Bulls Say

• Hormel is a well-managed company with a demonstrated ability to extract value from acquisitions, maintain financial discipline, and prioritize shareholder interests.

• Hormel is embarking on a large international expansion, which should allow it to capitalize on its brand equity as it customizes its mix to align with regional preferences.

• Jennie-O Turkey has experienced several challenges, with three-year average operating margins of 7%, but steps to overhaul the segment should return profitability to the low-double-digit rate of long term.

Company Description

Hormel Foods is a protein-focused branded food company. Its brands include its namesake Hormel, Spam, Jennie-O, Dinty Moore, Applegate, Wholly Guacamole, and Skippy. The vast majority of the company’s revenue is U.S.-based: 64% U.S. retail, 28% U.S. food service, and 8% international. By product type, in fiscal 2021, 23% of revenue was shelf-stable foods, 18% was poultry (branded and commodity), 55% was other perishable food, and 3% was other, primarily nutritional products. The company holds the number-one market position in shelf-stable meat, shelf-stable ready meals, pepperoni, natural/organic deli meat, and guacamole and the number-two position in turkey, bacon, chilled ready meals, and peanut butter.

(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.

Business Strategy & Outlook

 The InterContinental to retain its brand intangible asset and expand room share in the hotel industry in the next decade. Renovated and newer brands supporting a favorable next-generation traveler position as well as its industry-leading loyalty program will drive this growth. The company currently has a mid-single-digit percentage share of global hotel rooms and 11% share of all industry pipeline rooms. Its total room growth averaging 3%-4% over the next decade, above the 1.8% supply increase for the U.S. industry.

With 99% of rooms managed or franchised, InterContinental has an attractive recurring-fee business model with high returns on invested capital and significant switching costs (a second moat source) for property owners, as managed and franchised hotels have low fixed costs and capital requirements, and contracts lasting 20-30 years have meaningful cancellation costs for owners. The InterContinental’s brand and switching cost advantage to strengthen, driven by new hotel brands, renovation of existing properties, technology integration, and a leading loyalty program, which all drive developer and traveler demand for the company. InterContinental has added six brands since 2016; it now has 16 in total. InterContinental announced in August 2021 a new luxury brand, with details to be provided soon. Additionally, the company announced a midscale concept in June 2017, Avid, which the company sees as addressing an underserved $20 billion market with 14 million guests, under a normal demand environment. Also, InterContinental has recently renovated its Crowne Plaza (13% of total room base) and Holiday Inn/Holiday Inn Express (62%) properties, which will support its brand advantage. Beyond this, the firm has over 100 million loyalty members, providing an immediate demand channel for third-party hotel owners joining its brand.

Financial Strengths

InterContinental’s financial health remains good, despite COVID-19 challenges. InterContinental entered 2020 with net debt/EBITDA of 2.6 times, and its asset-light business model allows the company to operate with low fixed costs and stable unit growth, which led to $584 million in cash flow generation in 2021. During 2020, InterContinental took action to increase its liquidity profile, including suspending dividends and deferring discretionary capital expenditures. Also, the company tapped $425 million of its $1.3 billion credit facility, which has since been repaid. As a result, InterContinental has enough liquidity to operate at near zero revenue into 2023. The banking partners would work to provide InterContinental liquidity as needed, given that the company holds a brand advantage, which will drive healthy cash flow as travel demand returns. InterContinental’s EBIT/interest coverage ratio of 5.2 times for 2019 was healthy, and it to average 9.0 times over the next five years after temporarily dipping to 3.4 times in 2021. The company generates about $2.3 billion in free cash flow (operating cash flow minus capital expenditures) during 2022-26, which it uses to pay down debt, distribute dividends, and repurchase shares (with the last two starting in 2022).

Bulls Say

• InterContinental’s current mid-single-digit percentage of hotel industry room share is set to increase as the company controls 11% of the rooms in the global hotel industry pipeline.

• InterContinental is well positioned to benefit from the increasing presence of the next-generation traveler though emerging lifestyle brands Kimpton, Avid, Even, Hotel Indigo, Hualuxe, and Voco.

• InterContinental has a high exposure to recurring managed and franchised fees (around 95% of total operating income), which have high switching costs and generate strong ROIC.

Company Description

InterContinental Hotels Group operates 884,000 rooms across 16 brands addressing the midscale through luxury segments. Holiday Inn and Holiday Inn Express constitute the largest brand, while Hotel Indigo, Even, Hualuxe, Kimpton, and Voco are newer lifestyle brands experiencing strong demand. The company launched a midscale brand, Avid, in summer 2017 and closed on a 51% stake in Regent Hotels in July 2018. It acquired Six Senses in February 2019. Managed and franchised represent 99% of total rooms. As of Dec. 31, 2021, the Americas represents 57% of total rooms, with Greater China accounting for 18%; Europe, Asia, the Middle East, and Africa make up 25%.

(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.

Business Strategy and Outlook

Despite being the largest pure-play private-label food manufacturer in the U.S., TreeHouse’s performance has historically been stymied by poor execution, including lacklustre service levels and disjointed go-to-market efforts. Still, revamped leadership, strategy, and recent activist involvement have mostly remedied internal issues, and it is believed that the private label should continue to ascend, supported by secular trends across the U.S. retail and demographic landscape, once pandemic disruption subsides. While it is expected the windfalls from this rise to accrue disproportionately to retailers (who function as brand owners in this context), TreeHouse now has the right commercial and operational infrastructure in place to capture its fair share of growth and profitability. Management has reoriented the business strategy to align more with market dynamics instead of product categories. For categories that are either in early or mature stages of growth (snacking and beverages), the team is looking to grow the top line profitably through volume leverage and value-added innovation. For categories that are in stagnation or decline (typically centre-of-store wares), the goal is to maintain share and improve profitability through different manufacturing or order fulfilment processes. Ultimately, these mandates appropriately balance clarity with nuance and should allow it to optimize its asset base.

 Portfolio optimization is also a core strategy pillar, and it has rationalized many underperforming areas of the assortment. It has also divested secularly challenged business lines like nuts and ready-to-eat cereal. The firm is expected to be more aggressive in discontinuing or monetizing suboptimal assets. In this context, in March 2022, management announced its exploring strategic alternatives to maximize shareholder value through divesting its stagnant businesses (meal preparation) and realigning operations around the high-growth snacking and beverages business. While recent deals executed under the current management team have been more favourable, it is viewed this strategy with some scepticism considering the firm’s mixed track record regarding acquisitions thus far.

Financial Strength

TreeHouse’s financial health looks reasonable to us, though it does leave a bit to be desired. The company has leveraged up meaningfully in the past to fund acquisitions (like Flagstone in 2014 and Ralcorp in 2016), constraining its ability in recent years to make value accretive investments. Leverage is quite high (project 4.5 times net debt/adjusted EBITDA for 2022), although its expected this will fall below 2.5 times by 2025. As management continues work to divest assets (it recently completed the RTE cereal business sale, and one shouldn’t be surprised to see more portfolio grooming), even more cash should be available for debt paydown. TreeHouse generates a good bit of free cash flow, averaging in the mid-single-digit range as a percent of sales in recent years. While the company will continue to invest a fair amount of capital in modernizing and streamlining its production/warehousing, it is believed margin improvement, along with process changes (like increasing made-to-order products, which reduces inventory requirements and waste) will allow free cash flow to normalize in the mid- to high-single-digit range. TreeHouse also has other cash flow levers, including its receivables sales program, whereby it monetizes its receivables more quickly in partnership with a financial intermediary. The company is still responsible for administering and collecting the receivables, but net-net, it is expected this program will continue to reduce its working capital funding needs during any given period. The firm’s debt covenants are fairly restrictive. Most of the debt is secured, and maximum allowable leverage is 4.5 times, although the firm received a temporary waiver to exceed this ratio in February, given pandemic-related headwinds. Some of its notes also inhibit dividend payments. Longer term, as business fundamentals improve, debt is paid down, and the firm’s credit rating improves, it is anticipated it will have more favourable access to capital markets

Bulls Say’s

• The private label industry should continue to benefit from secular trends across the grocery retail landscape and demographic trends in the U.S. 

• If the coronavirus induces prolonged recessionary conditions in the U.S., private label will likely outperform, and TreeHouse would benefit disproportionately as a market leader. 

• Its massive manufacturing apparatus should allow the company to benefit from the secular shift toward small, niche brands, by way of co-packing arrangements.

Company Profile 

Treehouse Foods, the largest private label manufacturer in the U.S., is the product of a slew of acquisitions, the most significant being the 2016 acquisition of Ralcorp, Conagra’s former private brands business. The firm plays in over 25 categories, including snacks like pretzels and cookies, meals like pasta and dry dinners, and single-serve beverages like pods and ready-to-drink coffee. Retailers represent its most significant end-market, where it sells products for resale under retailer brands, but it also serves foodservice customers (providing a similar service as its retail business), industrial (selling bulk food for repackaging and repurposing), and branded consumer goods firms (under co-packing arrangements). Over 90% of its revenue comes from the US.

(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.

Business Strategy and Outlook

Changes to consumer behaviour surrounding travel as a result of the coronavirus have altered the economic performance of Norwegian Cruise Line Holdings, affecting its ability to generate excess economic rents over an extended horizon. As consumers returned to cruising after the 15-month sailing halt that ended in July 2021, cruise operators added COVID-19-related protocols, which have proven successful (as evidenced by lower positivity rates than on land) to reassure passengers of the safety of cruising in addition to the value proposition the holiday provides. Still, it’s expected Norwegian could intermittently see pricing competition as global supply returns to market, limiting near-term yield upside (also impacted by the redemption of future cruise credits through year end). On the cost side, inflated spending on the procurement of goods and higher oil prices could keep costs exacerbated in 2022. However, it is expected both pricing and costs to normalize over time, rising at a low single digit rate longer-term. Altogether, these factors lead to average returns on invested capital, including goodwill, these are set to fall below 10.5% weighted average cost of capital estimate over a multiyear period, supporting no-moat rating. Norwegian has carved out a compelling position in cruising, thanks to its freestyle offering, the product still has to compete with other land-based vacations and discretionary spending for wallet share. However it’s harder to capture the same percentage of spending over the near term, given the perceived risk of cruising, heightened by previous media attention.

While liquidity issues appear to be alleviating for cruise operators, Norwegian was able to liberally access the debt and equity markets since the beginning of the pandemic. Such capital market efforts signalled Norwegian’s dedication to weathering a return to normalcy for demand. Given that the firm should return to profitability in the back half of 2022, the $2.1 billion in cash of Norwegian’s balance sheet (as of March 2022) should provide ample dry powder for the firm to operate with over the near-term

Financial Strength

Norwegian has accessed significant liquidity since the beginning of the pandemic, most recently raising around $2.1 billion in debt in February 2022 to retire expensive, early pandemic issued notes with rates above 10%. These efforts signal Norwegian’s dedication to optimize its balance sheet opportunistically. Given that cash demands should largely be covered by advance ticket sales with the fleet fully redeployed, the liquidity constraints are becoming less worrisome, and that cash on the balance sheet ($2.1 billion as of March 2022) should provide cushion for a smooth operating conditions. Although the company is set to remain cash flow negative in 2022, it is expected it could achieve positive EBITDA performance for the full year. However, when considering the plethora of debt raises since the beginning of the pandemic, Norwegian is likely to remain above its 2.5-2.75 times net debt/adjusted EBITDA target it had previously sought to achieve. It doesn’t have Norwegian reaching around this range until 2028 as it slowly pays down debt and finances new ship purchases, implying a return to investment grade is a longer-term focus. Additionally, the firm surpassed its debt/capital covenant of less than 70%, ending 2021 at around 84% (with restrictive covenants waived into 2022), indicating a higher risk balance sheet.

Bulls Say’s

• As Norwegian is smaller than its North American cruise peers, it has the ability to deploy its assets nimbly as cruising demand rises, allowing for strategic pricing tactics. 

• The further rescission of COVID-related travel policies (particularly internationally) could allow cruises to appeal to a wider cohort of consumers, leading to demand growth faster than it is currently expect. 

• Norwegian has capitalized on leisure industry knowledge from its prior sponsors as well as the addition of high-end Regent Seven Seas and Oceania brands, gathering best practices and leverage with vendors

Company Profile 

Norwegian Cruise Line is the world’s third-largest cruise company by berths (at nearly 60,000), operating 28 ships across three brands (Norwegian, Oceania, and Regent Seven Seas), offering both freestyle and luxury cruising. The company has redeployed its entire fleet as of May 2022. With nine passenger vessels on order among its brands through 2027 (representing 24,000 incremental berths), Norwegian is increasing capacity faster than its peers, expanding its brand globally. Norwegian sailed to around 500 global destinations before the pandemic

(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.