Morning Note: Market news and updates from Visa and Atlas Copco.

Market News

US equity markets moved higher last night – S&P 500 (+0.5%), Nasdaq (+0.2%) – although Intel fell by 10% after hours following the release of a subdued outlook statement. This morning in Asia, equities generally drifted as optimism over China’s rescue measures faded: Nikkei 225 (-1.3%); Hang Seng (-1.8%); Shanghai Composite (+0.1%). Morgan Stanley cut its targets for major Chinese stock indexes, saying the country’s challenges with debt, demographics, and deflation are among hurdles to further equity gains.

The FTSE 100 is currently trading 0.7% higher at 7,581. Takeover deals will pick up in the UK this year, a Deutsche Numis survey showed. Almost nine in 10 corporates see a positive picture for M&A, with larger transactions expected.

In 2023, the US ended with a bang, pulling further ahead of China in the race to be the world’s biggest economy. GDP rose 6.3% in nominal terms last year, outpacing China’s 4.6% gain. The 10-year Treasury currently yields 4.10%, while gold trades at $2,021 an ounce.

UK consumer confidence climbed to the highest level in two years in January, GfK said, as slowing inflation made households more optimistic. The UK paused trade-deal talks with Canada, with each side accusing the other of obstructing progress. Sterling currently buys $1.281 and €1.1722.

Brent moved up to $82 a barrel and is headed for its biggest weekly gain since October on sustained geopolitical tensions and lower US crude stockpiles. The cost to ship refined products to Japan from the Mideast rose 3% to $101,000 a day yesterday, the highest since 2020, according to the Baltic Exchange. 

Source: Bloomberg

Company News

Yesterday evening, Visa released results for the three months to 31 December 2023, the first quarter of its FY2024 financial year. The figures were better than the market forecast, and the group reiterated its guidance for FY2024. The shares have had a strong run and, despite the robust nature of the results, saw a little profit taking (-3%) in after-hours trading post the announcement.

Visa is the world’s largest electronic payments network. It connects 14,500 financial institutions, 130m merchant locations, and 4.3bn cards. Visa is not a bank; it doesn’t lend or take on credit risk. It doesn’t issue cards or place the terminals at the merchant locations. Instead, the company earns a small fee from more than 210bn transactions processed on its network to generate annual revenue of more than $32bn.

The company is benefiting from the ongoing shift from cash and cheques (which still amounts to c. $18tn, growing at 2% p.a.) to electronic means of payment, and the growth of online retail, contactless, and mobile payment systems. We believe the industry is at an inflection point in terms of sales growth driven by the global proliferation of smart devices which provide a way to pay and to be paid. In emerging markets, a lack of physical communication infrastructure traditionally provided a barrier to payments growth, but that has been removed by the emergence of mobile phone technology and a government focus on digitalising cash to reduce the black economy.

During the latest quarter, Visa enjoyed solid trading, reflecting relatively stable business trends. Consumer spending remained resilient, driving growth in payments volume (+8%), and processed transactions (+9% to 57.5bn). Cross-border volume growth (which includes a lot of e-commerce) remained strong (+16%). The group enjoyed continued growth across its new flows, where the long-term revenue opportunity is estimated at 10x the size of existing consumer payments.

Net revenue grew by 9% on a constant currency basis, to $8.63bn, a touch above the market expectation of $8.54bn. This compared to company guidance of upper-mid to high single digit growth in a quarter that is expected to be the lowest print of the financial year.

Revenue was made up of service revenue (based on prior-quarters payment volume, +11% to $3.9bn); data processing (+14% to $4.4bn); international transaction revenue (+8% to $3.0bn); and other revenue (+18% to $692m). Client incentives, a contra-revenue item, were up 20% to $3.3bn.

The group continued to keep a tight rein on costs – operating expenses were up 7%, primarily driven by increases in personnel expenses. Adjusted EPS was up 10% on a constant currency basis, to $2.41, ahead of the market expectation of $2.34 and company guidance of $2.27-$2.31.

During the quarter, the group generated $3.3bn of free cash flow. The group’s balance sheet remains strong, with cash, cash equivalents, and available-for-sale investment securities of $21.4bn at the end of December. The main capital allocation priority is to invest to grow the business, both organically and via acquisition. Earlier in the week, the company completed the $1bn acquisition of Pismo, a global cloud-native issuer processing and core banking platform. The deal will enable Visa to provide support and connectivity for emerging payment schemes and real-time payments (RTP) networks for financial institution clients.

Visa also has an ongoing commitment to return excess cash to shareholders. The group has a record of strong dividend growth, with the latest quarterly payout raised by 15% to $0.52. During the quarter, the company also bought back $3.4bn of its stock, leaving $26.4bn of remaining authorisation for shares repurchases.

We believe the long-term growth prospects for Visa remain very attractive, more so given the acceleration in recent years in the shift to e-commerce, tap-to-pay, and new digital payments, and in the number of acceptance points at SMEs. In addition, the broad application of digital payments by businesses and government provides a huge market opportunity.

The group has reiterated its guidance for the financial year to 30 September 2024: low double-digit revenue growth on a constant dollar basis and low teens EPS growth. The company still expects the year to be more second-half weighted due to tough year-on-year comparatives. For the current quarter, the company expects upper mid to high single-digit revenue growth and high teens EPS growth.

In the near term, while some short-term uncertainty persists, the group remains confident in its ability to execute its strategy and expand Visa’s role at the ‘centre of money movement’. Persistent inflation and the ongoing shift to digital payments also provide a tailwind to growth, although a slowdown in overall consumer spending could be a drag. Spending across the network is very diversified, be it credit/debit, overseas/ domestic, discretionary/non-discretionary spend, and low/high ticket spend.  However, the company has previously said that if we do go into a recession, Visa is now stronger in debit – the card of choice in tougher times – than it was in the 2008/09 financial crisis. The group also highlights that if there is a recession, they have plenty of flexibility on costs and client incentives. Note that half of the group marketing spend is variable.

The other moderate uncertainty is the fact that both the CEO and CFO are relatively new in their roles. However, we don’t expect to see any shift in the group’s core growth strategy because of the changeover. On the regulatory front, Visa has a long-term track record of coping with change.

Source: Bloomberg

Yesterday lunchtime Atlas Copco released its 2023 full-year results. As expected, the final quarter was mixed although the company generated record annual revenue and cash flow. The near-term outlook remains subdued and, in response, the shares, which are listed in Sweden, fell by 4%.

Atlas Copco is a world-leading manufacturer of innovative compressors, vacuum solutions, generators, pumps, power tools, and assembly systems. The group has a diverse customer base made up of general manufacturing (22%); process industry (20%); electronics/semis (16%); construction (12%); auto (10%); and other (20%). The products help the customer to increase operational performance, save energy costs, reduce contamination, cut down on failures in the field, lower noise levels, and extend service intervals.

As a result, the company provides exposure to a broad range of trends: demand for increased energy efficiency and reduced emissions; increased use of lightweight materials in transport industries; the transition from petrol to electric vehicles; increased use of demanding materials and production environments in processes for semiconductor and industrial production; increased production automation and smart factories; demand for improved ergonomics; and increased demand for digitally-supported service offers. Overall, the company will play a role in the effort to reorganise and improve the resilience of supply chains, bring manufacturing closer to domestic markets, and increase automation in the face of higher labour costs or deteriorating demographics. Finally, over time the vacuum business should benefit from the expansion of the North American semiconductor manufacturing market.

The target is to grow revenue by 8% per annum, primarily through organic means, complemented by selective acquisitions of companies in or close to existing core competencies. The group operates an asset-light strategy – only components that are critical to the performance of the equipment are manufactured in-house. The company has integrated itself with its customers and can provide rapid and extensive services and support of their installed base of equipment. 36% of revenue (and 50%+ of operating profit) is generated from service (i.e., spare parts, maintenance, repairs, consumables, accessories, and rental). This is more stable than equipment sales (64%) and provides a strong base for the business and greater resilience in difficult times. The cost of the group’s equipment is low relative to the customer’s operating costs and, as a result, the company has strong pricing power, important at a time of raw material cost inflation. Atlas Copco is based in Sweden and reports in Swedish Krona (SEK).

During the final quarter of 2023, the overall demand for the group’s equipment and services was basically unchanged compared to the previous year but as expected weaker than in the third quarter. Year-on-year, the service business grew in all business areas while the order intake for equipment was mixed.

Revenue grew by 12% to a record SEK 45.0bn, slightly above the market forecast of SEK 44.3bn. In organic terms, which exclude M&A (+2%) and currency (no impact), growth was 10%. In the full year, growth was 22% to a record SEK 172.7bn, of which 14% was organic. Order intake grew by 1% in organic terms in Q4 to SEK 36.8bn, below the market forecast of SEK 39bn. For the full year, orders were flat at SEK 170.6bn

Atlas Copco operates through four divisions or ‘Techniques’, with the performance in the final quarter as follows:

·       Compressor Technique (44% of 2023 sales): organic revenue and orders grew by 15% and 7%.

·       Vacuum Technique (25% of sales): organic revenue grew by 3% and orders fell by 5%.

·       Industrial Technique (16% of sales): organic revenue and orders grew by 11% and 3%.

·       Power Technique (16% of sales): organic revenue grew by 10% and orders fell 11%.

Order volumes for industrial compressors increased while orders for gas and process compressors did not reach the previous year’s level. The order intake for vacuum equipment decreased due to weaker demand from industrial and scientific vacuum customers. Order volumes for vacuum equipment to the semiconductor and flat panel display industry were largely unchanged. The order intake for industrial assembly and vision solutions increased somewhat, while orders for power and flow equipment decreased.

Atlas Copco generates attractive margins, with gross above 40%, providing some shelter against rising raw material costs, and operating above 20%. In Q4, adjusted operating profit rose by 24% to SEK 10.0bn, versus the SEK 9.7bn market forecast, with the margin up 210 basis points to 22.1%, driven by increased organic revenue and previous year’s high costs related to supply chain constraints, that were not repeated. In the full year, adjusted operating profit grew by 27% to SEK 38.2bn, with the margin up by 80 basis points to 22.1%.  

EPS grew by 12% in Q4 to SEK 1.39, above the market forecast of SEK 1.50. Full-year EPS rose by 20% to SEK 5.75. The return on capital employed during the previous 12 months increased from 29% to 30%, well above the group’s 8.0% cost of capital.

The company has a robust balance sheet and continues to generate strong cash flow (SEK 8.8bn in Q4). Net debt reduced from SEK 25.3bn to SEK 23.4bn, while interest-bearing liabilities have an average maturity of 5.7 years. Financial gearing is still a very comfortable 0.5x net debt to EBITDA. During the year, the group continued to consolidate its industry with 17 acquisitions completed. The dividend policy is to pay out 50% of net income. With these results, the group has proposed a payment of SEK 2.80 per share, 22% higher than last year, equivalent to a 2% yield.

During the final quarter, the group announced that Mats Rahmström, the President and CEO, is stepping down after seven years in the role. He will be replaced on 1 May by Vagner Rego, currently Business Area President for Compressor Technique.

In the near term, the group expects ‘customer activity level will remain at the current level’, implying a slowdown in underlying demand.

Source: Bloomberg