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Featuring Hugh Giddy and Daniel Moore

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IML portfolio managers Hugh Giddy and Daniel Moore discuss the main themes which emerged from the February 2024 reporting season, including key results for companies in IML’s large cap portfolios.

<Lightly edited transcript>

Hugh: Welcome everybody to our results roundup for the February reporting season. With me is Daniel. If we look at the reporting season, I think it’s fair to say, there were quite a few head scratchers. Daniel will give you some examples where the share price performance and company performance don’t seem to have matched.

Overall, we were pretty pleased with our companies. If we look at the economic backdrop, the kind of themes that we’ve seen, the consumer seems to have held up pretty well. You are hearing all this media about the cost of living crisis, but overall consumers are, for the most part, still spending fairly freely.  Obviously, older consumers are a bit stronger than younger consumers.

You’ve seen China in a bit of a meltdown. Their property sector we’ve been talking about for some time, and it finally seems to be impacting iron ore. China’s got deflation, which means that it’s quite good for Australian companies that source their goods from China, retailers and so on, are able to source quite cheaply, because China doesn’t have the inflation we have in Australia.

You’re seeing companies under a bit of pressure from the wage increases. You saw that with Woolworths and Coles pointing to big wage settlements, for example. But overall, because there’s still a bit of inflation in the system, it looks like interest rates cuts are not on the near horizon as people were hoping. That seemed to be driving the market up, but the market’s gone up even despite the realisation that we’re not really rid of inflation in the near term. But into more detail on reporting season, Daniel…

Daniel:  Just to go through some good and bad results across the whole market, if we look at the good, or at least the share prices that went up the most in the month, the retail sector was very strong.  Wesfarmers was up 16% – the share price – the result itself was was pretty muted. Sales were pretty flat. Profits are up 3%. But this was a little bit above consensus, so it was a really strong price reaction.

Hugh: I think mostly based on Kmart doing very, very well. But the overall business only was up 3%.

Daniel: Correct. JB HiFi, was a really interesting one. Stock was up 10% for the month. Its profit was actually down 20%. But because, that was a little bit better than consensus. I think consensus was around -26%. We saw a pretty strong stock move there, to all time highs, actually. So, yeah, a little bit of a head scratcher. And Nick Scali, one of the strongest performers was up 18% for the month and its profit was down 30%  for the half. Again, all these retailer results, they’re guiding to pretty flat sales results for the next half. Which was again a bit better than consensus, but extremely strong price moves. In most cases, the stocks are trading at all-time highs. In fact, Wesfarmers is now trading at a higher PE multiple than CSL! Which has never happened before.

The other sector that did very strongly was tech. Huge share price moves. WiseTech was up 28%, Next DC up 23%, Altium got a take over bid – was up 31%. Again, the actual profit results were pretty muted. WiseTech was up 5% – profit was up 5%, Next DC EBITDA was up 5%. Nothing to write home about. But slightly above consensus, and I guess that technology sector is really bubbling along because of AI, the theme with AI, and the strong results of Nvidia overseas.

I guess if we go to the other side of the ledger. What were the weaker results across the market? Really iron ore, the iron ore companies were down around 8-11%: BHP, Rio, Fortescue. The results were okay: BHP was flat, Rio was down a bit, Fortescue was up a bit. Obviously the outlook’s looking a bit more challenged,  so they were down. Other results, Woolworths, stock was down around 7% or 8% for the month. It was a bit of a surprise, profits were pretty flat, only up around 2%, and the outlook was quite muted. Sales were only up one 1.5% in January. And obviously the news of, Brad Banducci leaving the business was taken negatively by the market. So that that was a good mix.

But Hugh, just talking about the portfolio, what were some of the winners and losers?

Hugh: Sure. So detracting from the portfolio were, Sonic Healthcare – revenues were okay, expenses were a little bit high, but we think it’s fundamentally a pretty strong business, it’s got a good balance sheet, done some acquisitions recently. CSL – the result was up 13%, and the outlook is very good on profits, I still believe. But they did say that the 112, which was the heart attack drug, has failed to meet its goal, and so won’t be proceeding with that. And Telstra with a 12% increase in profits had some smaller divisions slightly weak, and so the share price was down.

So it’s one of those things better profits, share price down and poor profits, share price up it seems in the market. Obviously we had some winners of note. Suncorp – I think all of us know we’re paying quite a lot more in insurance. They’re a beneficiary. And they’ve also had less of a natural hazard headwind. Orica, didn’t actually have their results but they did an acquisition, which the market liked. It looks like a very good sodium cyanide acquisition. And the other one to call out perhaps is Ampol. So, how are we seeing things going forward?

Daniel: Look, I think sometimes you have to separate market movements to fundamentals and that’s obviously what we’re focused on. The businesses we own in the portfolio, are producing really good results, whether it’s Telstra up 12%, Brambles was up 18%, its profit, CSL up 13%… we could keep going. The portfolio companies are performing well. And their outlook statements were quite strong. They may not be the most exciting businesses. They might not be the next AI companies, or benefitting, from recent themes that are very exciting (like) retail. But we think those businesses have good outlooks, and because they’re not in favour, are very well priced for the for the quality of business, they are. So we think, we’re well positioned, for the future, particularly, if any risks on the horizon do eventuate.

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