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Lunar Capital Weekly Roundup

Source: iress

Company and Market News

Novo Nordisk released their Q3 2022 results last week. Novo Nordisk is a health-care company that primarily focuses on producing treatments for diabetes, obesity and rare blood diseases. For the quarter, Novo Nordisk’s net sales increased by 28% to DKK (Danish Krone) 45,6 million compared to the same quarter last year. Net profit for the quarter was DKK 14,4 million, up 19% compared to the same quarter last year. Novo Nordisk’s Total Diabetes Care segment for the quarter accounted for 79% of their total sales. This segment also grew 26% compared to the same quarter last year. While their Total Obesity Care segment for the quarter accounted for 10% of total sales and grew by 81% compared to the same quarter last year.

On top of the solid growth metrics, Novo Nordisk remains very profitable. For the trailing twelve months (TTM), the gross margin for Novo Nordisk was 84%. This high gross margin indicates that Novo Nordisk has the ability to navigate a high-inflation environment without having to find significant ways to decrease their input costs. The net margin for Novo Nordisk was also strong. For the TTM, Novo Nordisk had a profit margin of 32%. Novo Nordisk also had a very high return on equity of 69%. This is partly due to high leverage through debt. Their debt-to-equity ratio is 217%. Their current liabilities are also greater than their current assets. If there were to be any significant impact to their operation, they could find it quite difficult to pay off their current liabilities for the year.

Another risk that Novo Nordisk faces is that they are in a highly regulated environment. Novo Nordisk also operates in multiple countries that will have their own set of regulatory requirements. The initial costs, in both time and money to develop and manufacture drugs can be quite high. There is always a possibility that a significant investment in a new treatment may not pay off.  Conversely, if they can develop a new treatment that works well and is approved by the health authorities; it can pay off handsomely. Our view is that the potential for their Total Obesity Care is quite significant.

Disclosure: Novo Nordisk is held in the Lunar BCI Worldwide Flexible Fund.
Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
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The Lunar BCI Worldwide Flexible Fund Fact Sheet  can be read here.
This roundup is prepared for the clients of Lunar Capital (Pty) Ltd. This roundup does not constitute financial advice and is generated for information purposes only.

Lunar Capital Weekly Roundup

Source: iress

Company and Market News

Last week, Alphabet, Microsoft, and Amazon released their results for the quarter ended 30 Sep 2022. These companies have a huge focus on cloud computing, and see it as a major driver of growth for their companies. Alphabet, Microsoft, and Amazon, along with the other services that they offer, offer customers the server infrastructure and platform to build and run their companies on. Overall revenue for the quarter was lower than the market expected. For the quarter, Alphabet’s total revenue was $69.1 billion compared to revenue of $65.1 billion for the same quarter a year ago, revenue for Microsoft was $50.1 billion compared to $45.3 billion for the same quarter last year;. And for Amazon, revenue for the quarter was $127.1 billion compared to $110.1 billion for the same quarter last year. However, net income for these companies for the quarter was lower compared to the same quarter last year. Amazon’s net income decreased by 9%, Microsoft’s net income decreased by 14%, and Alphabet’s net income decreased by 27%.

The companies all noted that they have seen noticeable decreases in consumer spending for all their segments. The one exception is that their cloud computing segments have still seen significant growth. Alphabet, Microsoft, and Amazon expect to see consumers further dial back their overall spending as the US economy likely goes into a recession. The negative outlook resulted in the share price for all these companies decreasing during the week. During the week, Alphabet’s share price decreased by 4.8%; Microsoft’s share price decreased by 2.6%; and Amazon’s share price decreased by 13.3%.

Below is a table showing certain metrics of the overall cloud-computing segment for each company. Alphabet, Microsoft, and Amazon’s revenues all increased by between 22% and 41% for the trailing twelve month (TTM) period. Despite Alphabet having the highest cloud revenue-growth, they still managed a negative cloud operating margin of -13.8% compared to Amazon and Microsoft, who had healthy operating margins above 30%. Alphabet are aggressively trying to expand their cloud computing business. The majority of the Alphabet’s capital expenditure for the quarter went towards their cloud computing operation. Setting up the infrastructure for cloud computing requires a lot of upfront capital, and is one of the reasons this segment for Alphabet is currently running at a loss. If Alphabet maintain their revenue trajectory for this operation, and are able to be disciplined with their cost structures, they could likely add another strong segment to their overall business.

Disclosure: Alphabet, Microsoft, and Amazon is held in the Lunar BCI Worldwide Flexible Fund.
Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/
The Lunar BCI Worldwide Flexible Fund Fact Sheet together with our Disclaimers can be read here.
A&EO.

Lunar Capital Weekly Roundup

Source: iress

Why Numbers Matter: In Review

A month ago we held our Lunar Capital client event: Why Numbers Matter. We’d like to share two of the short clips with you from the event.

The story of how Lunar Capital started

And the stories of some of the people who’ve invested with us

If you would like to talk to us about our products and what we can offer you, contact us via email at: [email protected] or phone Sabir at: +27 83 305 7860

Company and Market News

Last week, MTN released their interim results for 2022. Overall the results were quite good. Total revenue for the interim increased by 10.3% compared to last year. And profit after tax for the interim increased by 148.89%. The increase in revenue was largely attributable to the increase in data sales. Data sales were up 33.1%. Of the total revenue, data sales account for 34%. The stock price for MTN jump 6.46% last week on the positive news.

MTN is a telecom service provider that  operates primarily in Africa. The three locations which account for the most revenue are South Africa (25.6% of revenue), Nigeria (36.4% of revenue), and Ghana (10.2% of revenue.) One of the key metrics used when valuing a telecom provider is  Average Revenue per User per a month (ARPU). ARPU for MTN in South Africa was $6.01, Nigeria: $5.01, and Ghana: $3.60. In South Africa, a year ago the ARPU was $6.91. The decrease in ARPU in South Africa is as a result of data prices decreasing.

Some of the risks that MTN faces are high levels of inflation and hyperinflation in some  of the countries they operate in. This hurts their bottom line figures which are reported in ZAR. Telecom providers also have high fixed costs. This can negatively impact their profit in the long term if they are not able to grow their customer base.

MTN’s main competitor is Vodacom. However Vodacom’s operation is primarily focused in South Africa. For Vodacom’s most recent quarter, South Africa accounted for 77.8% of total revenue.

Below is a table comparing key metrics of MTN with Vodacom.

Disclosure: MTN and Vodacom are held in the Lunar BCI Worldwide Flexible Fund.

Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/

Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/

The Lunar BCI Worldwide Flexible Fund Fact Sheet together with our Disclaimers can be read here.

Lunar Capital Weekly Roundup

Source: iress

Company and Market News

Under Armour: a creator, marketer, and distributor of branded athletic apparel, released their Q1 2023 results last week. For the quarter, revenue remained flat at $1.3 bn compared to Q1 a year ago. Net income decreased from $59m in Q1 2022 to $8m in Q1 2023. The share price of Under Armour increased by 4.06% this week despite the disappointing news.

Under Armour operates in the athleisure/athletic apparel space with other brands such as Nike and Lululemon. Despite Under Armour and Lululemon making athletics-wear for the same purpose, Under Armour sells products to the mid-income market compared to Lululemon, who sell products to an upper-income market. An example would be if we compared the price of leggings. A pair of Under Amour leggings go for just under $75; whereas a pair of leggings from Lululemon can go for just under $100, with some leggings being priced at just under $120.

One of the things we like about premium brands, at Lunar Capital, is that they have higher margins compared to other brands. People that like a specific premium brand will stick to buying that brand compared to others. A downside, however, would be that in this current market, when interest rates are going up, and the disposal income of consumers is decreasing – consumers who were on the fringe of buying premium products may hold off on buying these products.

Below is a table comparing the margins and other financial indicators of Under Armour and Lululemon.

Disclosure: Lululemon is held in the Lunar BCI Worldwide Flexible Fund.

Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/

Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/

The Lunar BCI Worldwide Flexible Fund Fact Sheet together with our Disclaimers can be read here.

Lunar Capital Weekly Roundup

Source: iress

Why Numbers Matter – Lunar Capital Virtual Event

Join us this Wednesday at 18H00 as we will be hosting our client event: Why Numbers Matter

Numbers were used to predict trends and influence decisions during the Covid 19 epidemic, and Ridhwaan Suliman was at the forefront of making sense of these. The numbers paved the way to helping the world understand the pandemic and how to handle it. Lunar Capital also use numbers to determine market trends and the valuations of companies they invest in. Join Lunar Capital as Ridhwaan and Sabir explore and discuss the relevance of numbers in their respective fields and how Lunar Capital uses these to manage risk and grow your investments.

Sign up for our free event here.

Please forward this to anyone else you think may be interested.

Company and Market News

ASML

On Monday last week, A Bloomberg article reported that there were rumours that the US Government wanted to restrict ASML from selling some of their older semiconductor equipment like the DUV (Deep Ultraviolet) lithography equipment to China. A spokesperson from ASML said that, “No decisions have been made, and we do not want to speculate or comment on rumours.” Shares for ASML U.S. dropped from $449.96 on the Monday before the article was released to $432.21 by the end of Tuesday. However – by the end of the week the share price for ASML was $452.95.

Lithography and semiconductor equipment require licenses to sell overseas. Since 2019,The Dutch Government in conjunction with the US Government have not granted ASML the license to sell their Lithography machines, that use EUV (Extreme Ultraviolet) light waves to make high-powered semiconductor chips, to China. However ASML were still able to sell older equipment, that uses DUV technology, to Chinese customers. Of the €18.6 bl revenue in 2021, 14.7% of revenue still came from China. It accounted for the third largest revenue figure behind Taiwan (39.4%) and South Korea (33.4%).

As of Friday 8 July 2022, ASML was trading $452.95 on the Nasdaq compared to $796.14 at the beginning of the year. This represents a decrease in the share price of just under 40%, compared to the tech heavy NASDAQ which is down 26.51% since the beginning of the year.

Since the begging of 2019, revenue for ASML have grown at a CAGR rate of 19.36%, and net profits have grown at a CAGR rate of 31.43%. The company has averaged a net-margin of 25.66% since 2018. The company was trading at a PE of 34.55 as of Friday 8 June 2022. At Lunar Capital, we believe that the company has strong fundamentals and is still really well positioned due to ASML effectively having a monopoly on selling Lithography equipment in an industry with a high demand for semiconductors.

Disclosure: ASML is held in the Lunar BCI Worldwide Flexible Fund.

Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/

Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/

The Lunar BCI Worldwide Flexible Fund Fact Sheet together with our Disclaimers can be read here.

Lunar Capital Weekly Roundup

Source: iress

Company and Market News

Nike, one of the world’s leading designers, marketers and distributors of athletics wear, released their 2022 Q4 and full year results on the 27th June. The company’s share price closed at $101.18 on Friday last week. The stock is down 38.6% since the beginning of the year, compared to the S&P 500 which is down 20.26%.

For the year, Nike’s revenue grew by 5% to $46.7 billion, and had a net earnings of $6 billion (grew by 6%). The company did, however, return approximately $5.8 billion to shareholders through dividends and share buybacks. One of the struggles the company has been facing is the global supply-chain issues. Inventories for Nike increased 23% to $8.4 billion, mainly as a result of Nike having more unfinished products that they currently aren’t able to sell.

Generally, the more high-end a clothing company, the greater their gross margin. This means that companies with lower gross margins are more susceptible to inflationary price pressure as they could be forced to increase the price of their products if their costs increase dramatically. And that would lead to fewer people buying their products. The large decrease in the share price is likely due to the high levels of inflation in the US and Europe; the possibility of the US going into a recession; global supply chain issues; and Nike exiting operations in Russia. These factors are all likely affecting the near-term earning potential for the company. It is worth noting that one of the huge upsides for Nike, is that they have a really strong global brand with a large base of loyal customers that will only buy from them.

Nike’s competitors such as Adidas and Lululemon have also suffered similar fates to their share prices this year.  Below is a table comparing certain metrics for these companies as recorded on the 1st of July 2022.

Source: Iress; Nike, Adidas and Lululemon financial statements

Disclosure: Lululemon is held in the Lunar BCI Worldwide Flexible Fund.

Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/

Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/

The Lunar BCI Worldwide Flexible Fund Fact Sheet together with our Disclaimers can be read here.

Lunar Capital Weekly Roundup

Source: iress

Company and Market News

Prosus and Naspers released their annual results for the year ended 31 March 2022. In the annual results, they announced that they would start a share repurchase programme for their Prosus and Naspers’ shares. This would be funded by regularly a selling small number of the Tencent shares. The idea is that they want to decrease the difference between their Market Cap and Net Asset Value (NAV), which has been trading at a significant discount.

As it currently stands, Prosus effectively owns 29% of Tencent. This is by far their biggest holding, which is currently worth $134 billion. Prosus also owns a multitude of small ventures in the E-commerce space such as OLX, PayU, and Movile. According to Prosus, on the 31 March 2022, the NAV per share of Prosus was ZAR 1,759 versus a closing price of R795.76, representing a discount 54.8%. post the announcement of the results, the closing price on the 27th of June 2022, was R1 039.48, increasing by 18% from the day before the results and announcement of the sale of Tencent shares and repurchase of Prosus and Naspers shares were published. This has reduced the discount.

Similarly, Naspers has also been trading at a discount to its NAV and its shares went up by 22.8% on 27 June 2022, from the day before the results were announced. The estimated NAV per share of Naspers on 24 June 2022 was R5 398.30 per share versus the closing price on 27 June 2022 of R2 348.69, presenting a discount to NAV of 56% despite the 22.8% increase.

The sale of Tencent shares will be done in an orderly way, with no more than 2-3% of the daily trading volume of Tencent shares on the Hing Stock Exchange being traded.

Over and above the share repurchase programme, Naspers and Prosus have indicated that they plan to continue investing in other ventures that have the goal of generating sustainable returns over the long term. However, for the current year none of their other ventures, apart from the classified portfolio in Prosus\’s books and Media portfolio in Naspers’ books, have generated a profit. These loss making businesses together with high management costs will continue to discount Nasper and Prosus share prices versus their respective NAV.

Disclosure: Prosus and Naspers are held in the Lunar BCI Worldwide Flexible Fund.

Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/

Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/

The Lunar BCI Worldwide Flexible Fund Fact Sheet together with our Disclaimers can be read here.