Company Reports

Corning is a materials science behemoth with differentiated glass products for televisions, notebooks, mobile devices, wearables, optical fiber, cars, and pharmaceutical packaging. In its 170 years of operation, the company has constantly innovated (including inventing glass optical fiber and ceramic substrates for catalytic converters) and oriented itself toward evolving demand trends that it can serve through its core competency of materials science. Most recently, we point to Corning’s domination of the smartphone cover glass market and deals with US network carriers to supply fiber for 5G buildouts as evidence of the pivot toward growth.

In 2018, Devon embarked on a series of shrewd capital allocation moves that saw it sell its Enlink Midstream interest, divest its Canadian heavy oil and Barnett Shale interests, and merge with WPX. These astute steps allowed Devon to recycle cash by shedding interests that were either noncore or higher on the cost curve. Recycled cash allowed Devon to meaningfully pivot toward the Delaware and enjoy newfound exposure in the Bakken. Previously, both Canadian Heavy Oil and Barnett Shale made up 40%-50% of its production.

Darden Restaurants' playbook strives to leverage its competitive advantages, with the restaurant operator leaning into its scale-driven cost edge, embracing datacentric decision-making, trying to attract and retain employees with compelling benefits and culture, and providing a differentiated dining experience, consistent with management's back-to-basics strategy. While we view this approach as strategically sound, we expect any success at Darden to come in spite of, rather than propelled by, aggregate industry results, with the full-service industry ceding market share as consumers increasingly favor off-premises options at the expense of dine-in meal occasions.

Smucker has the leading brand in some categories, but we don’t think it enjoys pricing power or entrenched retailer relationships to create an economic moat. Its long-term strategy is to turn low-single-digit sales growth into mid-single-digit adjusted operating income growth, leading to high-single-digit adjusted EPS growth—but we expect mid-single-digit growth as likely.

As the smallest of the three pure-play food retailers in Canada, Metro has done a commendable job fending off competition in its core Ontario and Quebec markets with prudent merchandising strategies and strong execution. However, similar to larger rival Loblaw, we think ferocious price competition in the commoditized grocery market has prevented Metro from amassing any intangible assets or cost advantage to warrant an economic moat rating.

Home Depot is the world's largest home improvement retailer, delivering $153 billion in revenue in 2023. The firm's wide economic moat rating is based on its economies of scale and brand equity. While Home Depot has realized strong historical returns as a result of its scale, operational excellence and concise merchandising, all of which remain key tenets underlying our modest margin expansion forecast. Its flexible distribution network should help elevate the firm's brand intangible asset, with faster time to delivery improving the do-it-yourself (DIY) experience and market delivery centers catering to the pro business. The success of ongoing initiatives should allow for modest operating margin expansion above prepandemic levels in the longer term, despite near-term inflationary pressures and economic turbulence.

Vicinity Centres’ portfolio includes a wide variety of Australian retail property assets. Its largest asset is 50% ownership of Chadstone in Melbourne, which represents about AUD 3 billion of the AUD 14 billion portfolio at the end of December 2023. Central business district assets make up about 15% of the portfolio, including Sydney’s Queen Victoria Building, Strand Arcade, The Galleries, Brisbane’s QueensPlaza and Uptown, and Melbourne’s Myer Bourke Street and Emporium. Vicinity also owns factory outlet centers and suburban and country shopping centers, such as Carlingford and Warriewood in Sydney, Buranda and Gympie in Queensland, Mornington and Broadmeadows in Melbourne, and WA centers in Karratha, Mandurah, and Rockingham.

Because Swire Pacific is a conglomerate, its earnings are dictated by the performance of its various divisions. While each division faces different competitive environments, the majority of the group’s earnings is underpinned by recurring income from Swire Properties' investment property portfolio in Hong Kong and mainland China, Swire Coca-Cola’s bottling business, and Haeco’s aviation maintenance and repair services. This compares with the group’s property trading business and 45% interest in Cathay Pacific, which are more cyclical and capital-intensive in nature.

Over the past decade, Tencent has capitalized on the industry shift toward mobile gaming. The firm owns some of the world's most popular titles, like Honor of Kings and PUBG Mobile. To date, games remain Tencent's primary monetization model—as we estimate more than 40% of the group's operating income comes from this segment. Tencent should continue to leverage its unrivaled access to user data and financial capital to create innovative, high-quality, and long-cycle games with a mobile-first approach.

Charter Hall Retail REIT owns or partially owns an Australian portfolio of about 50 convenience-focused shopping centers, and several hundred service stations leased to BP, and Ampol in Australia, Gull in New Zealand. More than half of rent comes from tenants we view as unlikely to ever miss rental payments.

Swire Properties' 50-year history in Hong Kong has been characterized by patience and transformation. The company's modus operandi is to acquire assets in less-than-prime areas. Over a span of several decades, the company gradually builds, manages, upgrades, expands, and eventually transforms the entire areas.

Cromwell Property Group is an Australian property company that currently generates most of its income from rent on properties it owns, and a lesser amount from property funds management. The latter includes property management services, investment management, and property acquisitions and development, in collaboration with customers. The group tends to own co-investment stakes in funds or properties that it manages for clients, particularly in its wholesale business. This provides a degree of alignment with clients, as well as providing another indirect source of rental income.

Wix.com offers a software-as-a-service, or SaaS, content management system, or CMS, for building websites. The company primarily earns revenue by selling subscriptions to its platform where users can easily build, host, and maintain a website. Wix’s core value proposition is the ease of use of its main platform, Wix Editor, which appeals to do-it-yourself individuals and small and midsize businesses with less demanding website requirements (“self-creators”). However, Wix is now moving upmarket by targeting agencies and freelancers (“partners”) who build websites on behalf of others, mainly midsize businesses. Furthermore, Wix has widened its product offering to include a variety of add-ons to a user’s website such as payment services, email marketing, paid ad campaigns, Google Workspace, and a collection of apps created by Wix and third parties.

Hormel Foods has long been on US shelves, with strong meat-centric brands like Jennie-O, Spam, Dinty Moore, and various Hormel-branded goods. These brands tend to hold number one or two share in their categories. To keep pace with evolving trends, Hormel has expanded its focus through acquisitions of non-meat protein brands like Skippy and Planters and branded meat products like Applegate. It has also entered ethnic and emerging food with Wholly Guacamole, Herdez, and Happy Little Plants. Concurrently, Hormel has reduced its commoditized farming footprint, increasingly relying on third-party farmers. Taken together, we think these moves stabilize its competitive standing and improve profitability in the competitive packaged food arena.

While holding a modest 1% global market share in the competitive sportswear and equipment industry, Amer Spots has carved out a strategic niche such as outdoor apparel, hiking footwear, and tennis. Following its acquisition by Anta Sports in 2019, Amer underwent a strategic shift, pivoting away from growth primarily driven by acquisitions and wholesale operations. Instead, the company is now prioritizing the expansion of its product range and a direct-to-consumer approach. This strategic realignment is evident in Amer's increased investment in three core brands: Arc’teryx, Salomon, and Wilson.

Anhui Gujing is one of the eight national well-known baijiu brands. Thanks to its strong brand heritage and deep-rooted distribution network in the regional market, Gujing has become Anhui’s largest distiller by sales since 2012 and has led the province’s premiumization via sales growth of its flagship premium Gujing Year Puree series, which allows the company to enjoy decent profitability and returns.

BT Group owns the best and most far-reaching wholesale fixed-line network (Openreach) in the UK. Years of regulatory discussions and tensions caused BT to severely underinvest as it sought a regulatory framework that ensured acceptable returns on capital. The approval of the Equinox plan, which sets wholesale pricing for communication providers in Openreach’s network for the next 10 years, seems satisfactory for BT and has caused fiber-to-the-home investments to soar. BT will deploy more than 4 million FTTH lines per year until 2026, covering around 90% of the UK, up from less than 10% in 2019. Network duplication is however increasing in the UK as alternative networks like Cityfibre have stolen market share from Openreach stealing 450,000 lines in 2023. Virgin Media aims to cover 80% of the UK by 2026, up from 60% five years ago.

Tele2 aims to maintain its position as Sweden’s second-largest player in both the mobile and broadband markets. Although Sweden’s consumer market is relatively stable, we expect Telia, and not Tele2, to be the main target of any pressures coming from Telenor or HiG3. Telia is by far Sweden’s most expensive telecom provider, with prices 15% to 30% higher than peers in both mobile and broadband. Tele2 executes moderate price increases every year which customers seem to accept, but the pricing gap with Telia is still large. We therefore expect Tele2 will maintain or slightly grow its subscriber numbers steadily, while it moderately increases prices.

Ryman is New Zealand’s largest retirement village operator, controlling about a fifth of a fragmented market. It combines retirement and aged care facilities, so residents can transition from independent to supported living. In addition to a reputation for quality, we believe the integrated model is a benefit that many competitors would struggle to replicate, due to the costs of retrofitting existing nonintegrated facilities. We believe Ryman Healthcare remains positioned to achieve earnings growth over the next 10 years, driven by favorable demographics, and Ryman's brand. Ryman has expansion plans, particularly in Australia, though it has moderated its growth ambitions. Its expansion has been so far focused exclusively on the state of Victoria, mostly around Melbourne. Feedback from Australian customers has been positive. Though no sites have been acquired outside Victoria yet, we expect Ryman to continue to gain traction in Australia, and we assume it will eventually expand elsewhere in Australia. Ryman’s earnings are exposed to residential property prices on several fronts. Ryman’s residents typically fund their entry into a village by selling their primary residence, so residential property prices influence the proceeds residents have available, and therefore, Ryman’s development margins. Residents might choose to defer or even cancel their plans to move into a retirement village should they struggle to sell their property at a desired price, which could slow Ryman’s sales cycle, or undermine occupancy, which has typically been high. That could be detrimental for margins and returns, given the level of operating leverage in the business. Ryman sells occupancy rights to residents, but retains the exposure to capital gains (or losses) on its units, further adding to its house price exposure. Retirement unit management fees are also linked to sale prices of its units. A prolonged stagnation or fall in house prices and transaction volumes could have adverse effects on Ryman’s earnings.

Centuria Capital Group’s vision is to be a leading Australasian fund manager, an appropriate goal given its expertise in the business. Growth areas include alternative sectors such as agriculture, healthcare, and real estate credit, versus its history in core property sectors such as office and industrial. Even in its core property investments, Centuria has focused on smaller properties, or those outside the Sydney and Melbourne CBDs. Centuria Office REIT, one of its largest investment vehicles, holds much more suburban office, compared with office heavyweights Dexus, GPT, and Charter Hall which focus on CBDs. The focus outside CBDs should help the group as it diversifies into alternative property sectors, because the Centuria should be well versed in evaluating the more esoteric risk and return profiles of assets in healthcare, agriculture, and other varying sectors.