Featuring Marc Whittaker and Lucas Goode



IML portfolio managers Marc Whittaker and Lucas Goode discuss their main takeouts from February 2024 reporting season, including key results for companies in IML’s small-mid cap portfolios.

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Marc: Hi there everybody. Thank you for joining us for this post reporting season review. We’re here to talk about the small and mid cap funds and how they performed across the reporting season, and of course talk about the results more generally. I think fair to say, Lucas it was quite an interesting, intriguing, reporting season.

Lucas: They always are!

Marc: That’s right. Lots of winners, lots of losers, as they say, but I think generally speaking, a reporting season that was better than expected.

Lucas: Yes, I think that’s a fair comment, Marc. Certainly with top lines, what we’re seeing across most of the economy and the market is the top lines are reasonably anaemic overall, but maybe better than feared.

Marc: That’s right. I think consumers are still in generally, a better place than expected. Whether that will last is a different question. Certainly for what we saw in February, the consumer is holding up pretty well, and retailers and discretionary and cyclical, companies did tend to perform well.

Lucas: I think that’s right Marc but I guess what I’d add to that comment, particularly with discretionary retail, yes, top lines were a bit better than feared, but what we also saw was a big focus on costs. You saw companies that had strong control over their costs rewarded. And retail’s the sector that has benefitted from lower freight costs, from maybe product deflation out of China, versus other companies and sectors that maybe have struggled to grapple with their costs. We saw some of the health care companies really having issues with labour.

Marc: That’s right. So that was an interesting contrast, wasn’t it? So the discretionary retailers tended to out perform. The cost of goods sold benefits from lower costs and they surprised on the upside. Health care companies, Australian Clinical Labs, which is one of the stocks we own in our portfolios, disappointing because the increase in labour costs have been higher than expected, and harder to get under control.

Lucas: I think that’s absolutely right. And a couple of other large holdings of ours that we still really like. You know, Kelsian, for example, very strong top line. Actually their operating result was pretty good, but some higher costs below the line, depreciation and interest, really hurt them. TPG also, again, strong top line in mobile, but a lot of OpEx going to the business really disappointed the market and saw the shares underperform during the month.

Marc: On a brighter note we had quite a few strong performers across the month, which is good to see. What were the highlights for you from that point?

Lucas: Well as I mentioned, Marc, whilst top lines might have been better than feared across the market, still pretty anaemic overall. And what we’re also seeing really rewarded are companies that can offer strong growth in such a tough macroeconomic environment. Imdex is one that I’d highlight, had really underperformed based on what really looked like to us unfounded concerns that these issues with lithium and nickel were gonna weigh on the expiration outlook. Imdex is a great company, world class technology, a true industry leader, and what we’ve actually seen is that they’re able to grow quite strongly, made a really good acquisition last year. HMC Capital is another. We’ve seen really strong ability to attract funds under management. You’re really seeing that operating leverage come through. The market was quite excited by that. And HiPages is another one that we’ve owned for a while. They have actually had the good top line growth for a while, but we’ve seen that commitment to cash flow breakeven this year, and again, really rewarded. The stock was up around 40% for the month. It was great to see. I know you’ve got a few stocks that you wanted to highlight as well Marc.

Marc: Any stock up 40% is great by the way Lucas. So, two strong performers, certainly from my point of view, one was Bega Cheese. Up close to 12-13% for the month. A long term holding in the portfolios, and one we’ve really liked for a long period of time. There are two parts of that business, the branded business, so we’re familiar with the likes of Vegemite, Dairy Farmers and Dare Iced Coffee and associated brands. Don’t forget Farmers Union! Farmers Union of course, you’re a good Adelaide boy, you know all about that Lucas. Certainly that part of the business performing well, and performed as expected. So that was good to see because they have had to cycle a lot of cost increase. They’ve been able to get those price increases through. The consumers held up pretty well as we said at the opening of this segment, and so the trade down to their brands was evident in some way, but they’ve still been able to maintain those strong sales lines in their key brands, which is good. And then on the bulk commodity side where the market’s been really concerned about, global commodity prices and on the dairy side and where those prices have gone and what that means for the profitability of that part of the business. But you’re still losing money in that business for this particular financial year, but they won’t lose as much money as people thought. And that was a nice reason for the share price to perform quite strongly for the month.

Another one that I liked in the reporting season was SG Fleet. Again, this is a stock we’ve owned for a long period of time. We’ve talked about it, ad infinitum, to many people over a long period of time. Market leader in the fleet, leasing and fleet management, sector of the market. A great result. Top line moving really well. And what actually I liked about the result was the quality was really good because people have been concerned that they’ve been benefitting from these second hand disposal values of second hand cars as fleet cars are rolled off their lease and they’ve been resold. Those prices have been elevated partly because of a COVID, hangover. That part of the revenue line has actually been shrinking, which is good to see because the reduced revenues have been more than offset by new business wins and new sales.

Lucas: So one off revenue lower, recurring revenue higher.

Marc: Yes, so the quality of that result is actually quite pleasing to see. And the shares were strongly up for the month, up around 17-18%, and well justified and still very cheap, still very cheap. So a lot of what we like in the reporting season, the likes of, Ampol, trading at all time highs.

Lucas: Deservedly so I might add!

Marc: That’s right. The likes of Aurizon and so forth. These are long term core holdings in the portfolios. All delivered well in terms of revenue growth, the ability to maintain margins, generating good cash, and paying us very good dividend yields at the same time. So that’s what we’re really focused on in the portfolios.

Lucas: I think that’s the key point moving forward, isn’t it Mark? It’s great to see management get cost under control across large parts of the market, but you can’t cut your way to growth. And longer term, we do remain really attracted to these companies that have these sustainable recurring revenue, competitive advantages. And we still see a lot of M&A in the market as well. And you know we don’t own Altium, and I would point out that, that result was actually pretty terrible. But they did get a takeover offer. But we did benefit in the portfolio from further M&A during the month.

Marc: We did. So QIP or Quantm Intellectual Property Partners. Has received a very early stage, sort of tentative bid, I guess, you would say, but certainly one which is enough to give that share price, a nice kick up, up something like 18% for the month. Also on the back of what was a very good result too. Costs out, but revenue is also looking quite reasonable.

Lucas: There’s that theme again, Marc.

Marc: That’s right. So in terms of outlook, Lucas we’re obviously heading into March and April and we’ll get more updates an companies as the year progresses, but hard to see revenue lines outperforming again. I mean, the consumer has outperformed today, but you know, moving to a softer space. I think that’s fair to say. I’m saying margins will be under pressure, if you can’t hold revenues and costs are still growing. So, what sorts of companies are we focusing on?

Lucas: I think the same as ever Marc, we’re just looking for high-quality businesses that are trading at discounts to our intrinsic valuation. And we are seeing lots of opportunities for pockets of dislocation in the market and areas that we feel really good that, we can make money for our unitholders. But clearly the macro environment, it’s not terrible. It’s definitely better than feared, but it’s not amazing. It does worry us maybe about some of these retailers that are trading at such stretchy valuations, despite what was still a pretty soft top-line outlook. You know, we remain pretty optimistic for the outlook for the Australian economy and certainly for the outlook for the companies within our portfolios.

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