Ron Shamgar lays out the investment thesis for a stock he believes will soon be the subject of a takeover offer.
ClearView (CVW.ASX)
Note: This investment thesis was originally circulated to clients on 9 December 2021. CVW remains a position in TAMIM Australian equity portfolios.
ClearView is a financial services company which partners with financial advisers to provide life insurance and wealth management services. The company has undergone substantial changes in recent years and is focused on developing their new platform for life insurance to drive scale and efficiency. Clearview currently works with 772 dealer groups, representing over 4000 advisers. Clearview has been performing well in challenging market conditions; they saw increased claims last year and with interest rates at an all-time low, interest income has been significantly impacted. That being said, ClearView continues to execute its strategy which has led to a steady share price recovery. We believe the company remains materially undervalued given its strong growth profile and embedded value (EV).
Life Insurance Industry
Authors: Ron Shamgar & Adam Wolf
The life insurance industry was rocked by the 2019 Royal Commission which saw many of Australia’s major financial institutions in the news for all the wrong reasons. This was further exacerbated by other negative events such as the Freedom Insurance debacle. The impacts of this were mainly centred on how life insurers sell their products, and this has put a huge stain on the industry in recent times, but this is now in the past and ClearView is on a growth trajectory. The industry participants have also been engaged in the very unprofitable activity of scrambling for market share by lowering costs. This has seen a collective $5bn being blown up by insurers over the past five years in a race for market share. New regulations from APRA have seen the sector change their policy prices, bringing the sector back to profitability.
Source: CVW company filings
The recent issues faced by the sector has seen several insurers trading at depressed prices and, with investors overlooking the sector in general, we see a huge opportunity in ClearView. The sector has returned to profitability and the company looks to implement transformative initiatives in order to grow their business. Looking forward, life insurance is a necessary product and all working age individuals have a need for income protection insurance. Australia also has sky high household debt, typically a tailwind for Total and Permanent Disability (TPD) insurance cover which covers the costs of debt repayments. High household debt coupled with population growth and the repricing of policies gives us a positive outlook for the growth of the industry in general.
Source: CVW company filings
FY21 Results
FY21 saw ClearView report a strong result to the market with operating earnings up +83% to $23.9m and underlying NPAT up +54% to $22.7m. Considering the challenges presented by low interest rates and Covid-19, this was an exceptional result for ClearView. They saw their gross premium income rise +7%; this growth will follow through to FY22 as they raise their pricing policies. Even though funds management represents a very small piece of the business, the core focus is firmly on insurance, ClearView also increased their funds under management by +22%.
Capital Management
It is important to assess a company’s ability to allocate capital, what capital management strategies they are using to return value for shareholders and whether they are making the most of opportunities. ClearView has been buying back shares aggressively and, while we typically prefer dividends (it makes more sense with franking credits as opposed to US companies that prefer buybacks), they have executed these buy backs at an opportune time (around 50 cents per a share). They have also extended the program, indicating that management still think the share price is too cheap. ClearView has also reinstated their fully franked dividends and intends to payout 40-60% of operating earnings.
ClearChoice Transformation
As part of ClearView’s multiyear transformation they have been developing and investing in their new insurance platform ClearChoice, which will be replacing their existing life insurance platform. The new platform will deliver an enhanced user experience, drive efficiencies, and become a single source of truth for all customer data. Improved access to accurate customer information and the ability to generate data-driven insights to capture timely opportunities and aid strategic and tactical decision-making is one of many benefits to come from ClearView’s new ClearChoice platform. The platform is launching in Q2 FY22 and will also implement new policy pricing increases which will increase operating earnings.
Source: CVW company filings
Sale of Financial Advice Business
In August ClearView announced the sale of their financial advice business to Centrepoint Alliance (CAF.ASX), another holding in our Australia Small Cap Income portfolio. The total consideration for the sale was $15.2m to be paid in cash and shares, Clearview receiving 48m CAF shares and $3.2m in cash. The deal with Centrepoint Alliance provides the combined entity with immediate scale, a strong and effective management team, best of breed technology/processes and the capability to take a market leading position in the financial advice industry to build a strategically successful and profitable financial advice business. The deal allows ClearView, through their interest in Centrepoint Alliance, to continue participating in the growth of the financial advice sector while effectively removing any perceived conflict of interest.HUB24 Partnership
Last year ClearView announced a partnership with HUB24 which will see over $1bn in funds under administration migrated from the current ClearView WealthSolutions wrap platform to HUB24. The partnership is set to deliver on ClearView’s previously advised project seeking a modern replacement solution for its wrap technology. It is expected to substantially address the tax credit issue for the ClearView Retirement Plan and foster business simplification as they continue growing their life insurance and wealth management businesses.Manulife Partnership
ClearView has entered a strategic partnership with Canadian wealth firm Manulife Investment Management, the global wealth and asset management segment of Manulife Financial Corporation (MFC.TSE), to launch a range of products with an immediate focus on retirement income solutions. It is important to note that it is a non-binding memorandum of understanding (MOU) (we typically don’t like to pay too much attention to non-binding agreements). The partnership will leverage ClearView’s local product development and distribution capabilities with Manulife’s global expertise across public and private asset classes as well as ESG integration. Given Australia’s rapidly ageing population, this is a thematic worth targeting.
Outlook
As mentioned, the life insurance industry has been through a particularly turbulent period due to pandemics, Royal Commissions, and broad poor pricing policies. With all this now in the rearview mirror, the industry has returned to profitability and is growing. Yet Clearview is still trading at a substantial discount to its asset base. This is despite the fact that it is a profitable business with sustainable recurring revenue that has made a number of strategic adjustments to turn the company around. APRA’s new regulations on pricing policy will boost profitability and, given how high household debt is in Australia, insurance policies are always going to be in high demand. Additionally, Clearview’s new ClearChoice platform will help them create more efficiencies in the business and begin to leverage the data they collect to produce insights that will further help them grow the business.
But none of this is why we bought this stock as a takeover target.
Strategic Review
In early September of this year [2021] CVW announced that:
“following an evaluation of the Company’s future capital structure and discussions with CVW’s largest shareholder, Crescent Capital Partners, the Board has commenced a strategic review process. Its objective is to maximise shareholder value, determine the optimal future direction of the Company to protect and enhance customer and policyholder outcomes, and achieve a long term shareholding base.
This review will assess strategic options to unlock and enhance value for shareholders, including potential change of control transactions. … Crescent Capital Partners has advised the CVW Board that it supports the strategic review.”
Source: CVW company filings
Why do we believe a takeover is imminent?
Very similar wording to the above was used by Crescent holdings Cardno (CDD.ASX) and Intega (ITG.ASX) when strategic reviews were announced for them in June, both stocks were held in TAMIM funds. Approximately four months later both companies had received significant takeover proposals from strategic acquirers.
CVW represents the last remaining meaningful life insurance asset up for grabs in Australia with approximately 7% market share. We believe this share is significant enough for someone looking to enter the domestic market and grow but also not large enough to cause competition concerns for an existing player to acquire.
In addition, we believe Crescent’s investment in CVW must wind up and realise its investment into cash by June 2022. This means that they are a motivated seller which in turn makes a favourable outcome (for other shareholders) highly likely by February 2022, as signalled by the board.
The value of an insurance business lies in the embedded value (EV) of its policies and their future cash flows discounted to today. This embedded value can change over time based on new business growth rates, franking credits). Historically, life insurance companies have been acquired in the range of anywhere between 0.8x to 1.6x EV. In the case of CVW, this suggests a figure in the range of 77 cents to $1.54. Usually, when an insurance business is growing like CVW, it is trading or acquired at a premium to EV.
CVW has previously seen two takeover attempts; the first in 2012 by Crescent and the second in 2016 by Sony Life. Due to several reasons at the time, neither eventuated but the offer then was $1.50. While it is unlikely that shareholders will see $1.50 again, we cannot rule it out. Most likely, and based on the current environment, we believe that our base case scenario would be a takeover at a premium to EV of +10%. With some luck, we may end up seeing a bidding war which may then see a much higher offer, i.e. toward $1.50 mark.
We believe that the most likely acquirers would be either a Japanese life insurer, private equity or a new domestic entrant looking to diversify into the life insurance industry. As discussed above, the conditions for the industry are finally positive again.
Disclaimer: ClearView is currently held in TAMIM Australian equity portfolios.
This week we are looking at a small cap company that is providing software solutions to the hospitality sector while also expanding into overseas markets with huge addressable opportunities. The company has a market cap of only $100m and has mostly gone unnoticed to date, without any media coverage, even though they have been growing quickly, making acquisitions and are now EBITDA positive. The events and hospitality industry are clear post lockdown winners and the companies that provide the sector with services will benefit accordingly.
Author: Adam Wolf
MSL Solutions (MSL.ASX)
MSL is a global provider of software solutions to businesses in the sport, leisure and hospitality industry. MSL employs 160 staff and has grown its footprint to service more than 8,000 venues around the world. Only two years ago the serviced less than 1,500 venues. MSL develops and delivers fully integrated and modular systems that connect customers to venues through mobile and contactless entry, ordering and payment solutions. MSL’s solutions seamlessly connect front-of-house to backoffice, offering an end-to-end guest engagement platform which provides actionable insights on key success metrics to venues of all sizes.
Acquired in late 2020 after years of being their largest reseller, MSL’s centerpiece offering is point-of-sale (POS) software SwiftPOS which provides an end to end solution for venue operators. The software is fully integrated and covers the whole value chain in operating a venue. The solution manages your inventory, CRM, loyalty programs, check ins etc. When running big events at stadiums and arenas the organisers need a one stop shop platform that can help them shift inventory, staff and decide who gets discounts in a matter of seconds, SwiftPOS does just that. The market for smart stadiums is growing as stadium owners are looking to lift the experience of fans through a fully integrated system that can be accessed online to handle things such as merchandise and parking availability. The solution also collects all the data which can later on be used for analytics to increase efficiencies for the customers.
Source: MSL company filings
OrderMate Acquisition
In October this year MSL acquired OrderMate for $5.5m in cash and $2.0m in MSL shares. To fund the acquisition MSL raised $4.5m from an oversubscribed share purchase plan (SPP) and issued a $4.5m convertible note with a 0% coupon rate to US based Taubman Capital. We will touch on this later. OrderMate provides POS services to Australian food and beverage venues, enabling efficient ordering, transactions and payments to over 2,400 customers. The focus is on restaurant, cafe and fine-dining venues with the business delivering normalised FY21 EBITDA of more than $1m.The acquisition will provide the group with synergies as they leverage sales and marketing channels and costs alongside aligned business development efforts that will help MSL benefit in sales growth by leveraging new sales channels in Australia, UK, US. There will also be efficiencies across combined cloud hosting / service fees.
Source: MSL company filings
In the recent presentation call, CEO Pat Howard noted a few times that the plan is to take OrderMate to the UK, leveraging their extensive reseller network to grow sales. The UK has been out of lockdown for a while now and entertainment/hospitality has been booming, making this a timely opportunity for MSL to enter the market.
OrderMate is fully integrated with over thirty providers. These include payment providers, CRM, accounting software etc; thismakes it more salable and removes the hiccups that businesses may have in integrating the software into their business.
Source: MSL company filings
The team have proven they are more than capable at executing M&A transactions that unlock strategic value for the business, realise operational synergies and create value for shareholders. As mentioned, they acquired SwiftPOS in November 2020. MSL was the largest reseller of SwiftPOS and the acquisition has now become the main focus of the business, seeing a 20+% increase in revenue in FY21 on a like-for like comparison to FY20.
Recently we saw OrderMate partner with Doshii to provide OrderMate venues the ability to connect even more of their hospitality apps. This partnership is the second agreement between Doshii and MSL Solutions after the announcement between Doshii and the MSL owned SwiftPOS in March 2021. An Australian scale-up, Doshii is a middleware platform that enables hospitality venues to seamlessly connect their point-of-sale with a wide range of hospitality apps, including pickup and delivery, in-venue ordering, rostering and reservations apps. Doshii helps venues eliminate double handling of orders, reduce mistakes, and find new opportunities to streamline their operations and increase revenue. The agreement is expected to be worth over $800k over the next five years. This is in addition to $1.3m+ over five years announced in March 2021.
Taubman Capital
As mentioned, MSL issued a convertible note to private equity firm Taubman Capital to raise cash for the OrderMate takeover. Looking deeper into Taubman’s operations and other investments, this is far more significant than first meets the eye. Taubman, a US based PE investment firm, has investments into leisure, venues and hospitality in North America. Over the last 71 years, the Taubman family has built Taubman Centres into a leading global owner and operator of regional and super-regional malls. Taubman Capital’s most recent investment, Venuetize (who have partnered with MSL to target US customers), is an e-commerce platform in the sports and hospitality sector in the US. Spanning nine US sports leagues, this includes customers such as Live! casinos, the PGA Tour, the NBA’s Memphis Grizzlies, MLS’ Los Angeles F.C.. Having Taubman as a shareholder is strategically huge for MSL given that their other portfolio of investments could provide significant material contracts for MSL’s POS systems. MSL’s relationship with Taubman is exactly what they need to strengthen their foothold in the US market.
US Opportunity
The US market represents a huge opportunity for MSL to capitalise on. American sports leagues are enormous and have a presence throughout the country both in top tier pro leagues and college sports. MSL’s strategic partnership with ParkHub, a parking management system, and Venuetize makes their overall proposal much stronger as these customers are looking for one system that can do everything. Given the number of venues some of their target customers run, it would only take a few of customer wins to substantially boost their recurring revenue. On the back of their relationship with Taubman alone, MSL should have a good runway to execute on their US growth plans.
Source: MSL company filings
This pipeline above represents real targets that MSL are aiming to convert on in the medium term. Venuetize has a strong relationship with ASM Global, who have 392 locations across the US including the likes of Soldier Field and Barclays Center (in Australia they own major venues like ANZ Stadium, Suncorp, RAC Arena, Qudos Bank Arena etc), which could provide a $30m opportunity for MSL. To put that in perspective, MSL’s FY21 revenue was $25m. A contract of that scale would more than double their revenue.
Golf
MSL also provides solutions to golf clubs that help them manage the club and the relationships with members. While this is a smaller part of the business, MSL have secured long term contracts that provide annuity like income with Golf Australia and other federations. The software also collects a lot of useful data about the members and can even tell you their score on the day, something that will become more and more useful as the field of data science grows. Revenue from golf products accounted for 35% of FY21 revenue but this will slowly become less important as SwiftPOS and OrderMate gain scale.
Source: MSL company filings
Outlook
MSL is a business that has made a number of strategic acquisitions and partnerships and is now well set up to take on huge addressable markets. Yet they haven’t received much attention, which is why there is an opportunity for investors. MSL ticks a lot of the boxes for us for in terms of a GARP (growth at a reasonable price) investment. They are currently trading on a market cap of about $100m and have a cash balance of around $8m. Their revenue is mostly sustainable and recurring subscription revenue, a key consideration for our investment process.
Source: MSL company filings
Looking forward, the company is now EBITDA positive and has a huge pipeline ahead of them. The OrderMate acquisition strengthens their POS offering, opens up a big addressable market in the UK and should add over $2bn in annual transaction value. As of right now the business generates most of their revenue from subscriptions fees, in the future we think MSL will look to start generating transactional revenue and, given the group are doing over $7bn of transactional value annually, this represents a huge up side scenario.
Source: MSL company filings
While MSL has integrated with payment providers like Tyro, they are unable to extract value from them. Given the role that payment providers play in POS, we think that MSL will look to do some more M&A in this area and maybe takeover an existing payment provider. There are quite a few payments businesses that have invested a lot of money building the business but have struggled to gain traction and the owners may be looking to exit. A transaction like this would make a lot of sense for MSL.
We also expect MSL to start leveraging the data they are collecting to provide businesses with deep analytical insights to create efficiencies going forward. Whilst payment providers can tell you where consumers are spending money, they can’t tell you exactly what items or products they are spending on whereas MSL’s solutions can; this is far more valuable.
In a November update MSL saw Q1 FY22 revenue of $7.7m (unaudited), an increase of 40+% from Q1 FY21 (prior corresponding period), driven by UK business rebounding post-Covid and the positive contribution of the SwiftPOS acquisition completed in November 2020. MSL’s pipeline should look far bigger in a post lockdown environment. The timing of the OrderMate acquisition has coincided with the NSW and Victoria states emerging from lockdown seeing 85 sales orders closed, making October OrderMate’s highest sales month for 2021.
Finally, the big driver of the business will be expansion into the US. It only takes a few contract wins to add significant revenue to the business given how many sites it could add for SwiftPOS. MSL’s convertible note issue to Taubman, who are now well aligned to support MSL’s growth in the US, gives them a foot in the door and an opportunity to win contracts from Taubman’s other portfolio of companies.
Disclaimer: MSL is currently held in TAMIM portfolios.
This week we look to conclude the series with some insights into two more pharma companies that we believe could make for an interesting addition to investor portfolios. Both are potentially high growth and arguably further up the risk curve (if one is to define it by traditional valuation metrics).
Moderna (MRNA.NASDAQ)
This is one security that we’re quite sure most of you will have at the very least come across recently (i.e. their Covid-19 vaccine, Spikevax). Before delving further into the company however, it is probably good to start off by at least gaining a very basic understanding of the niche in which they operate; that is, in the development of RNA therapeutics.
As of today, the company’s only commercial product remains its Spikevax Covid-19 vaccine and the company has faced some governance issues, most recently in the form of board member Moncef Slaoui taking up a position as the head of Operation Warp Speed during the Trump administration and holding onto around US $10m in stock options at a time when the company received around US $483m in Federal Funding. Despite this, Moderna’s pipeline remains particularly interesting. I personally, became interested in the company in mid-2019 (so pre-Covid!) not due to its ability to tackle Covid but rather its pipeline of vaccines and treatments in relation to influenza, HIV and, more importantly, cancer (returning to one of our thematics). In particular, the company retains two potential vaccine candidates for cancer and is working in conjunction with AstraZeneca (AZN.NASDAQ) in cancer immunotherapy.
Author: Sid Ruttala
With that, lets get to the numbers (which are rather straightforward given that for now Moderna’s only commercial product remains Spikevax). Third quarter revenue of US $5bn, Net Income of US $3.3bn giving a fully diluted EPS of around US $7.70 per share. We expect the company to come up with full year vaccine sales of approximately US $21.5bn and $21bn in 2022 before tapering off. What will be interesting to watch here will be sequential revenues as the vaccinated population moves toward booster shots. On a related note, the CEO has recently suggested that existing vaccines may not be effective against the new Omicron variant of Covid-19, with the implication being that a new vaccine would have to be developed over the next six months (at the very earliest). This will certainly be the space to watch. However, what we would like to emphasize is that Covid-19 vaccines, while instrumental in propelling the company from an early stage biotech to a US $150bn company, are not the entirety of this company. The biggest change has first and foremost been the validation of its underlying mRNA technology platform and the ability to now use the cashflow generated to further speed up its work across other products and markets.
Covid-19 and associated vaccines will, we feel, be up for competition, not least from emerging markets and players. In other words, the initial windfall will not be sustainable. The more likely scenario is that revenues from this segment taper off into the low-single-digit billions annually, contingent on whether people continue to receive vaccinations over the long run (i.e. booster shots, new strains). We are also very likely to see increased competition and declines in pricing power as the sector and governments continue to adapt. So, why then do we feel that this may be a buy?
For one thing, the record-breaking speed of eleven months in which time the firm created and developed the two-dose vaccine, not only placing the company firmly in the limelight but also accelerating the development of clinical know-how and manufacturing capabilities that will pave the way for faster timelines in other products. Of these, the most significant progress to date has been concerning Human Metapneumovirus (Phase 1), Respiratory Syncytial Virus (successful Phase 1, moving to Phase 2 and 3), and HIV Vaccine (Phase 1). On the oncology front, the company continues to work with Merck (MRK.NYSE) and AstraZeneca in immunotherapy and groundbreaking personalised cancer vaccines (Phase 2, results pending in 2022).
From an investor perspective, the ability to have that number of potentially addressable markets while at the same time having exposure to growth via an existing product line is what makes Moderna a potentially lucrative investment. Typically, companies working on early stage and novel therapies do not have the ability to generate cashflows to fund R&D expenditures for consistent periods of time, especially should always inevitable unforeseen outcomes eventuate. That said, the investment is not for the feint of heart, the Covid-19 landscape continues to evolve and the company does face some uncertainty around its only commercial product line. But, with a PE of 21.61x, one wouldn’t be paying up egregiously for a potentially lucrative multi-decade investment.
Fate Therapeutics (FATE.NASDAQ)
Fate is a clinical-stage biopharmaceutical involved in cellular immunotherapies for cancer. Before proceeding further it maybe pertinent to understand a key characteristic that we look for, especially in earlier stage. That is, a niche with potential scalability. Moderna, for example, focuses on mRNA as its niche and that could be scaled up to work across multiple segments. Similarly, Fate focuses on something called iPSCs (induced Pluripotent Stem Cells). Briefly, let us first look at what iPSC technology is. It was pioneered by Shinya Yamanaka, for which he was awarded the Nobel Prize in Physiology or Medicine in 2012 alongside John Gurdon. He was able to show that the introduction of four specific genes, now known as the Yamanaka factors, could take a somatic (or undifferentiated stem cell) and turn it into pluripotent one, Pluripotent, as the name would suggest, is a cell that can differentiate into any of the three primary germ layers: endoderm (interior stomach lining, gastrointestinal, lungs), mesoderm (muscle, bone, blood, urogenital) and ectoderm (epidermal tissues and nervous system). Essentially, the discovery that mature cells can be converted to stem cells.
Think then about the potential for a company that could take a renewable pluripotent cell and then derive clonal populations? Currently the process for immunotherapy involves taking cells from specific donors with desired attributes, ex vivo modulation and then the creation of cell products for therapeutic functions. Fate seeks to circumvent then entire process and create 1) a renewable master cell line; 2) Cryopreservation which implies longer shelf-life and, most importantly for the profit motivated investor, 3) deliver it off the shelf. The potential for commercialisation and economies of scale could be substantial.
The global market size of lymphoma in Non-Hodgkin lymphoma alone could be around US $27bn. Which brings us to our first point for the not so patient investor. Although the initial results for their off-the-shelf treatment for lymphoma were below expectations, the fact that of eleven patients treated, six achieved remission seems to have been altogether missed by the market. In terms of what is in the pipeline for the future: unmet medical needs and potential off-the-shelf treatments for AML, myeloma and solid tumors. Of these, the solid tumors component seems to be the most promising with a Investigational New Drug (IND) application, for FT536, to be submitted before EOY in order to target multi-antigen targeting.
Looking at the numbers, though not particularly relevant given the early stage, revenue stands at US $11.1m. Importantly, the company has US $888m in cash and equivalents on the balance sheet (important as it indicates that a capital raise wont be necessary in the near term). Assuming operating expenses stay at current levels, $57.3m per quarter, this would imply that company has about four years worth of cash left. On the negative side, with a current market capitalisation of US $5.25bn, the market is certainly expecting a blockbuster in the near term. We would argue, rightly so.
Disclaimer: Both MRNA and FATE are owned by the author of this article.
This week we will be visiting a stock in our Global Mobility portfolio that is poised to benefit from the themes of electrification and autonomy. While these thematics are well known and are well covered, most investors look to only a few select stocks to benefit from the trends (i.e. Tesla or their favorite lithium stock). Our Global Mobility portfolio focuses on finding the companies that are forming the ecosystem around these core thematics, the companies that will benefit from these trends but are perhaps less known to the everyday investor.
Author: Adam Wolf
Aptiv (APTV.NYSE)
Aptiv manufactures, and sells vehicle components internationally. The company provides electrical and electronic tech products as well as safety technology solutions to the automotive and commercial vehicle markets through two main segments, the first being signal and power solutions and the second being advanced safety and user experience. Key positioning in high demand and rapidly growing industries such as autonomous driving, E-mobility, and smart vehicle architecture are likely to set Aptiv up well for the foreseeable future. Their signal and power solutions are aiming to capitalise on the need for high voltage subparts for electric vehicles.
Aptiv solutions optimise electric vehicle architecture, making intelligent design trade-offs that reduce cost, weight and mass. This allows for faster democratization of technologies that reduce CO2 emissions and reduce traffic accidents and fatalities.
Government mandates are accelerating electric vehicle demand
We are seeing countries around the world, especially in Europe, begin to tighten various mandates on carbon emissions. Many are trying to do so before 2030. This is a huge backdrop for electric vehicles and other carbon friendly thematics such as uranium, carbon credits, hydrogen, solar/wind energy and the like. While they aren’t manufacturing electric vehicles themselves, Aptiv’s solutions are critical for the viability of electric vehicles, Aptiv are integral in reducing carbon emissions but they aren’t getting the same credit for it, especially compared to their customers.
Source: APTV company filings
High voltage
Electric vehicles are being adopted rapidly worldwide but it is still in its infancy and there are still some pressing inefficiencies that need to be addressed. Unlike an internal combustible engine (ICE), an electric vehicle needs to be charged which can be time consuming depending on which charger you are using. On top of this, they are somewhat limited in their range, a real issue until appropriate charging infrastructure is rolled out or ranges improve. Consumers are demanding faster charging cycles, which means higher voltages and currents. Higher voltages and current brings greater reliability and performance requirements, which increase vehicle range as well.
Increasing the voltage level from 400V to 800V represents the most efficient way to optimize performance. By doubling the voltage, considerably more power can be transmitted in the same time with the same current, which can lead to up to half of the charging time compared to a 400V system. When scaling up the electrical vehicles to 800V, the requirements of all sub-components change. All parts in the e-drive motor´s construction must be adapted and entire mechanical sub-systems need to be electrified, creating a huge opportunity for companies that produce these subparts to capitalise on. Aptiv estimate that the requirement for high voltage equipment in an electric car is 1.5-2.0x higher than a traditional ICE car. Aptiv have positioned themselves to be a key player in the electrification ecosystem and will benefit from the increased demand for high voltage subparts. Aptiv currently provide high voltage cabling, high voltage connectors, internal battery connections, charging cable sets and inlets, power distribution boxes and battery disconnect units.
Source: APTV company filings
Architecture optimisation
Electric vehicles require a lot more wiring and denser materials compared to an ICE. this increases the weight of the vehicle and is one of the reasons electric vehicles are more expensive. As mentioned, government mandates are currently fueling the rise in electric vehicle adoption but, in order for them to be rolled out at a mass scale, the price needs to come down.
Source: APTV company filings
Using AI and data models, Aptiv provide architecture optimisation solutions that help manufacturers save costs, reduce weight and minimise errors. Aptiv provide software solutions that break the vehicle down into zones which allows the manufacturers to break apart the vehicles physical complexity into more manageable zones and further drive up the integration of ECUs (electronic controller unit – a small device that controls the electrical systems in the vehicle), reducing the weight and lowering the total system costs in the vehicle.
Source: APTV company filings
Hyundai Partnership
Aptiv has formed a partnership with Hyundai Motor (005380.KRX), a joint venture (they have both dedicated $2bn to this JV) whose objective is to develop a robot taxi platform. The first model should be ready before year end with a new version in 2022. Hyundai Motor Group and Aptiv will each have a fifty percent ownership stake in the JV, valued at a total of US $4bn. Aptiv will contribute its autonomous driving technology, intellectual property, and approximately 700 employees focused on the development of scalable autonomous driving solutions. Hailing a ride from your smartphone is no longer new. Google’s (GOOGL.NASDAQ, owned) Waymo have been operating a fully driverless service in Phoenix for a while now. The JV’s goal is to make riding in an electric/hybrid vehicle driven by a computer system commercially viable in Las Vegas. For once, what happens in Vegas doesn’t need to stay in Vegas.
Connectivity
The technology content of vehicles has continued to rise as a result of infotainment systems, greater safety, and convenience. In order for autonomous vehicles to be fully operational, the vast majority of roadside infrastructure will also need to be connected. This involves traffic lights, sensors, cameras, road maintenance etc all communicating with each other. This will enable cars to safely travel at higher speeds, preemptively reduce their speed when necessary as well as aid in the efficient flow of traffic, preventing traffic jams. Autonomous vehicles may be widespread before this point but this will be required to maximise their benefits and efficiency. As a result of the increased amount of data, there is an increasing demand for solutions that enhance connectivity. Aptiv are developing vehicle to vehicle (V2V) and Vehicle to infrastructure (V2I) communication technologies which enable vehicles to detect and signal danger, reducing collisions and improving safety. Aptiv’s solutions will maintain connectivity to an increasing number of devices both inside and out of vehicles utilising connectivity solutions such as over the air (OTA) technology that enables vehicles to receive software updates remotely and collect market relevant data from other connected vehicles.
Investment Thesis
The past year has been a tough one for Aptiv. Widespread chip shortages and fractured supply chains are having a huge impact on electric vehicle production in general. The decline in EV production has definitely slowed down Aptiv’s growth but the thesis for broader increased EV production remains strong and, once these shortages normalise, Aptiv should have a huge pipeline of sales ahead of them. Interestingly, Aptiv tick every box in terms of the pillars we are looking at in our Global Mobility portfolio (electrification, autonomy and connectivity/sharing). Aptiv present as an opportunity to gain exposure to all three thematics in this $10tn mobility revolution and yet they aren’t one of the names you think of when talking about electric or autonomous vehicles. The management team are well aligned with shareholders and have done an exceptional job at creating shareholder value.
Source: APTV company filings
The valuation of 19x EV/EBITDA next twelve months (NTM) seems more than reasonable to us considering how big this company can truly be once the autonomous and electric vehicle industries advance from infancy. We expect EBITDA to be around $2.7bn in FY22 which would be a rise of over 30%, considering how EV production has been declining in the past year this is still a good result.
Source: APTV company filings
Electric and autonomous vehicles still have a long way to go to reach full functionality and efficiency in order to replace ICEs (and drivers themselves). Aptiv’s solutions are helping electric vehicles become more affordable and more convenient to use. Aptiv has already established a dominant position in the high voltage subpart market and, if they can capture the customers they are targeting by 2023 (most of whom are already customers), they will have a big chunk of that particular $25bn addressable market.
Aptiv have a strong position in the ecosystem enabling the electric/autonomous vehicle industry and we can see them being a market leader in their segments. In doing this they will be an integral piece of the $10tn revolution we are looking to exploit. All being equal, in a more mature industry this could mean a much larger market cap for Aptiv (currently $43bn).
Disclaimer: APTV is currently held as a long position in TAMIM’s Global Mobility portfolio. The TAMIM Global Mobility strategy seeks to to capitalise on the ongoing $7 trillion autonomous and electric vehicle revolution.
This week we continue on to the final in the pharma series by looking at specific companies that we feel are worth at least a review by investors. As elucidated last time, the categories that offer the most lucrative long-term opportunities are Oncology, Diabetes and Cardiovascular. It is with this in mind that we look at prominent or interesting players, they are DexCom, Bristol-Meyers Squibb, Moderna and Fate Therepeutics. The last two we shall leave for next week given the complexity of the issues on hand and the nuance required in explanation.
DexCom (DXCM.NASDAQ)
Author: Sid Ruttala
To sum up DexCom, the company is in the business of glucose monitoring for diabetes. A certainly lucrative market that places it front and centre in a tremendous growth category. For those that read last week, this is potentially the biggest growth category in both emerging and developed markets. So, what is the problem that the company seeks to solve?
At the risk of sounding overly simplistic, one of the biggest issues for diabetics is the ability to consistently monitor glucose levels. Traditional processes included metering (i.e. many may be familiar with strip metering), a rather ineffective process that relies on individuals to constantly stop and use test kits (using needles to prick). DexCom’s CGM (Continuous Glucose Monitoring) system is a small wearable device that sends continuous readings to a user’s smartphone.
This may be one way for investors to gain access to a growing and lucrative healthcare market while having the same advantageous characteristics of technology companies (i.e. sticky revenues). The business relies on every consumer that signs up buying higher-margin consumables for years to come, much the same way as Apple creates an ecosystem for its own products. The flipside however is that sensor technology, although the company is a first entrant and has rapidly updated its tech, faces increased competition and is not protected in the same way as Neuren, for example, with its own pharmaceuticals. What is also important to note is that DexCom’s product is consumable and has to be replaced within a period of 10 days. After this users would be required to buy again at a cost of US $349 per box (three units per box). Here we have to remember how heavily subsidised the consumers are in this space). In a way, this is effectively recurring revenue in.
So, why does this make sense?
Aside from its revenue model, DexCom continues to grow at an exponential pace. Seemingly unaffected by the ebbs and flows of Covid-19, quarterly revenues growing 30% Y-o-Y and the firm maintaining its market leadership in both accuracy and usability despite competition from industry giants such as Abbott’s (ABT.NYSE) FreeStyle Libre, which we might add is more competitively priced, and Medtronic (MDT.NYSE). On the latter, Medtronic’s own insulin pump offers an integrated CGM in conjunction with its insulin delivery. However, the fact that the company continues to retain customers and increase market share is rather telling. Moreover, its collaboration model with companies such as Tandem (for insulin release) makes it more flexible than those with a more diverse revenue model, such as Medtronic.Getting to the numbers; revenues up 30%, US revenue continues to grow at 20% while it has recently expanded into further growth markets where sustained increases of 35% are on the table. We project this to continue to grow at 35% this calendar year (above managements own guidance of 15-20%). More attractively, Gross Margins continue to run at circa. 69%. Assuming this to be correct and using a 5-year forecast period, revenue should grow from circa. US $1.9bn currently to $8.5bn. DexCom’s continued expansion into the G7 nations and smaller European countries bodes well for the future.
Red Flags & Risks: The biggest risk remains its current valuation at a P/E of 109. Nevertheless, for the growth investor the important metric to consider is potentially the Price to Sales which remains 19.46 (still a premia especially when compared to traditional competitors like Abbott or Medtronic).
Price Target over a 5-year period: US $1,500 per share (currently trading at ~$600). Assuming discount rate of 3%.
Bristol Myers Squibb (BMY.NYSE)
From a high growth, high P/E company we move onto one of the largest pharmas on the planet. Many may already be aware of the Bristol Myers Squibb (or BMS), given the company’s more than 100-year history. The good, including Presidents Clinton’s accolades and culmination in the award of the National Medal for Technology, to the not so good in the early 2000s where it was accused of maintaining a monopoly of its cancer drug Taxol (Paclitaxel), a vital prescription in the treatment of a number of cancers, from breast to cervical. It has also been an unfortunate addition to many investors’ portfolios in recent years.
So, why now?
In answering that question, let us begin with why investors have seemingly discounted the business. As is perhaps rather evident from the mention of monopoly in Taxol, BMS plays across all the segments that we feel rather bullish on, most importantly oncology and cardiovascular. What investors have seemingly focused on (and discounted) to date has been the loss of major patents across its major portfolios over the next decade, including its blockbuster oncology treatments Revlimid, Sprycel, Pomalyst and the all important immunology play Orencia. These four make up 50% of all sales. The market also continues to be rather unimpressed with its largest acquisition to date, Celgene, at a rather hefty price tag of US $74bn (to put that in context, current market cap is circa. US $128bn). We, however, see this as a crucial piece in further expanding BMS’ oncology footprint, Celgene focusing and well entrenched in blood cancer. A more recent acquisition is Medarax, for another US $2.4bn, which again cements its footprint in cancer immunotherapy (for which it remains a first-mover).
This brings us to our first point, we feel that the business has made rather astute acquisitions that should cement BMS’ leadership positions in oncology, despite the market seemingly unimpressed with the positions. Moreover, BMS also has a partnership with Pfizer (another favourite we previously wrote on) in the cardiovascular category. Aside from this point, the market continues to be seemingly unaware or at the very least discounting several new drugs in the pipeline that we believe should make up for the gradual decline in other categories as patents expire. This includes things like Zeposia (used to treat relapsing forms of multiple sclerosis) and Breyanzi (CAR-T cancer drugs i.e. immunotherapy). These drugs bring us to the second point, the business seems to be focused on higher margin/lower volume products, which we continue to love.
For those more interested in the upside, the business continues to focus on late-stage pipeline to do with cardiovascular and cancer drugs to replace and effectively be upgrades on the expiring patents. This suggests to us that the market may have this business wrong in its assumptions. We forecast that the potential earnings of new releases and upside of late-stage pipeline should more than compensate for the expected decline in earnings as a result of patent expiration.
Red Flags & Risks: As a rule of thumb, we prefer organic growth to M&A and BMS has accumulated total debt of approximately US $51.67bn (though it has been seeking to pay it down). This requires management to be almost perfect in implementation and commercialisation of its late stage pipeline for our own undervalue thesis to play out.
Price Target over a 5-year period: US $95 per share, assuming sales continue to hold up with the addition of new drugs. We expect Reblozyl and mavacamten to support an additional US $3.8bn in annual sales at peak.
Aptiv manufactures, and sells vehicle components internationally. The company provides electrical and electronic tech products as well as safety technology solutions to the automotive and commercial vehicle markets through two main segments, the first being signal and power solutions and the second being advanced safety and user experience. Key positioning in high demand and rapidly growing industries such as autonomous driving, E-mobility, and smart vehicle architecture are likely to set Aptiv up well for the foreseeable future. Their signal and power solutions are aiming to capitalise on the need for high voltage subparts for electric vehicles.
