Stock Pick

  • Dell Plots $50 BIllion More of Financial Finessing

    Dell Plots $50 BIllion More of Financial Finessing(Bloomberg Opinion) — Dell Technologies Inc.’s magical merry-go-round of financial engineering is spinning once again.The corporate computing giant is examining options for its majority stake in software-company VMware Inc. that include a spinoff of the holdings, the Wall Street Journal reported late Tuesday. VMware shares soared roughly 10% on the news in after-market trading, valuing Dell’s 81% stake at around $55 billion. To understand why Dell would contemplate a transaction like this, you only have to look at Dell’s own market value, which despite a rise of its own on the news of the possible spinoff amounted to only about $40 billion. Put another way, Dell isn’t getting full value for either its ownership of VMware or its own computing and data-storage business that took in around $80 billion of revenue in the most recent fiscal year. And it wants to remedy that. But for all of shareholders’ early enthusiasm, a spinoff of the VMware stake would appear to be just a superficial fix for the complexity that’s long weighed on the value of Dell’s various businesses. Dell acquired its stake in VMware through the $67 billion buyout of EMC Corp. in 2016. As part of that transaction, the company created a tracking stock that was meant to mirror the value of VMware, which remained independent and publicly traded. It didn’t work very well. The tracking stock lagged substantially behind the price of VMware shares. Meanwhile, Dell’s massive debt load and complicated capital structure made a traditional IPO process difficult when founder Michael Dell and private-equity firm Silver Lake wanted to try to reintroduce the company to the public markets following a 2013 buyout. So in 2018, Dell decided to simplify things by buying out the tracking stock. A protracted battle ensued with shareholders of the tracking stock — including P. Schoenfeld Asset Management and Carl Icahn — who felt they were being low-balled, but eventually a deal got done. In hindsight, owners of the tracking stock were right to push for more cash and a complicated equity-collar mechanism, seeing as the Class C stock that made up the remainder of the takeover bid hasn’t fared as well on the public market as Dell might have hoped. Which brings us back to the present. If you kept up through that long, winding tale of financial engineering, you might be wondering why Dell went through the process of unraveling the VMware tracking stock if it was just going to recreate the general idea several years later, as this latest spinoff plan would seem to suggest. The exact structure of a spinoff of the VMware stake is unclear and the Journal reports that talks are at a very early stage and may not go anywhere. Potentially, a spinoff would confer more direct ownership of the VMware business to shareholders than the tracking stock previously did, helping to simplify the valuation process. But it’s hard not to shake the feeling that we’ve been here before.An alternative option that Dell is considering is a buyout of the VMware shares it doesn’t already own, the Journal reported. But that would add to its still mammoth debt load and doesn’t really do much on its own to address the fact that Dell shareholders aren’t inclined to give the company credit for the VMware stake it already holds. Ultimately, a buyout of the rest of VMware, followed by a spinoff of the whole thing, makes the most sense but would take a long time and is easier said than done. Recall that Dell initially tried to bring VMware further into the fold as part of the negotiations that ultimately led to the tracking stock deal, but both management and shareholders of the target company balked.Is this latest finessing going to make Dell a better-run company? Doubtful. Is it going to boost the company’s stock price over the long run? Maybe. But if after years and years of financial engineering, you’re still not seeing the kind of equity valuation you want, perhaps its the financial engineering that’s the problem.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

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  • Why this fund manager believes PolyNovo shares are undervalued

    Man in white business shirt touches screen with happy smile symbol

    The PolyNovo Ltd (ASX: PNV) share price may have jumped 56% over the last 12 months, but one fund manager believes it can still go higher.

    Who is bullish on PolyNovo?

    According to a recent update by the DNR Capital Australian Emerging Companies Fund, it has recently initiated a position in PolyNovo.

    PolyNovo is the medical device company behind the NovoSorb technology, which was developed by CSIRO following the Bali bombings.

    NovoSorb is a biodegradable material that can be used to aid the repair of bone fractures and damaged cartilage, and in skin grafts.

    The key product in its portfolio is the NovoSorb Biodegradable Temporising Matrix (BTM) product. NovoSorb BTM is a wound dressing intended for treatment of full-thickness wounds and burns where the dermal structure has been lost to trauma, or damaged requiring surgical removal.

    Why is PolyNovo undervalued?

    DNR Capital believes that PolyNovo is undervalued based on its future cash flows.

    It commented: “We believe Polynovo shares are undervalued based on our assessment of long-term cash flows. The company has a leading product that is in the early phase of its penetration into a large addressable market of $1.5b.”

    It’s worth noting that DNR Capital isn’t including other markets that the company has its eyes on. Adding these into the equation would increase its addressable market opportunity to an estimated $7.5 billion per year according to management.

    DNR Capital explained: “We don’t ascribe value to the hernia and breast opportunities given the limited visibility on cash flows, as these products need to pass certain milestones before they become commercial.”

    In addition to this, the fund manager notes that PolyNovo’s earnings growth potential is very strong and its outlook is increasingly positive.

    “With the business now at a cash-flow break even run-rate, we expect significant earnings growth as it penetrates a large addressable market estimated at $1.5b. The business generates attractive gross margins of 90%, which will lead to high returns on invested capital.”

    “The company continues to reinvest into research and development with a number of new products to be launched targeting the hernia and breast market, with the combined opportunity valued at $6b,” it added.

    Should you invest?

    I think DNR Capital makes some great points and PolyNovo could be well worth considering with a long term view. Though, given the premium that its shares trade at, you might want to consider limiting an investment to just a small part of your portfolio.

    And here are more exciting shares which could be stars of the future…

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    Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

    The post Why this fund manager believes PolyNovo shares are undervalued appeared first on Motley Fool Australia.

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  • Why I think the Telstra share price could hit $4 in 2020

    Man with mobile phone standing over modem, telecommunications, telco. Telstra share price, TPG share price, vocus share price

    I believe the Telstra Corporation Ltd (ASX: TLS) share price could hit $4 in 2020.

    Let’s be clear, this isn’t an earth-moving price target. Telstra shares have been at $4 before, most recently in August last year. Before then, the ASX telco giant actually spent between 2012 and 2017 above $4 per share, even hitting $6.50 at one point in 2015. We were getting close to $4 in January this year (Telstra touched $3.90), but then the coronavirus pandemic hit and Telstra has been stuck in a rut at around $3.20 ever since. Right now, one Telstra share will set you back just $3.17.

    So why do I think Telstra shares can make it back to $4 and potentially beyond in 2020?

    There are two reasons:

    Telstra shares and dividends

    The first is Telstra’s dividend. This company has quite an infamous history when it comes to dividend payments. Some shareholders might still not have forgiven Telstra for slashing its dividend back in 2017 from 31 cents per share (annually) to 16 cents today. It’s my view, this was partly behind Telstra’s massive re-valuation between 2015 and 2018.

    But Telstra has managed to keep it’s dividend steady at 16 cents per share for close to two years now, and I don’t believe there is any danger this will be cut down any further. For one, the dividend is comfortably covered by Telstra’s free cash flow. And two, the company is close to putting the damage done to its earnings by the NBN behind it.

    So what’s so good about Telstra’s dividend then? Well, at 16 cents per share (which includes 6 cents in ‘special’ NBN dividends), Telstra is offering a 5.05% dividend yield. If you include the full franking that Telstra shares also come with, this grosses-up to 7.21%. That’s not a bad yield in a zero interest rate environment.

    What about 5G?

    The second reason I believe Telstra shares could reach $4 this year is the rollout of the new 5G mobile technology. 5G is the next generation of mobile network and promises unprecedented speeds, low latency and increased applications. We don’t know for sure just how many benefits 5G will bring to the table, but if the rollout of 4G a few years ago is anything to go by, it looks likely to be good news for all ASX telco companies. And Telstra looks set to be in prime position for this shift. It is investing more into 5G than its competitors, from what I can see, which could see better speeds and range for Telstra’s 5G network compared with anything Optus or TPG Telecom Ltd (ASX: TPM) delivers.

    Foolish takeaway

    All in all, I think Telstra’s healthy dividend policy, as well as its investment in 5G technology, could well see the Telstra share price hit $4 again in 2020. As such, Telstra is a share that I’m very happy to own, and I don’t anticipate this changing anytime soon.

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    Motley Fool contributor Sebastian Bowen owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

    The post Why I think the Telstra share price could hit $4 in 2020 appeared first on Motley Fool Australia.

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