MARCH 2023 – ISSUE 13
Good assets get better,
and turnarounds are hard.
AUTHOR: Prasad Patkar
The February 2023 interim reporting season was tough for many companies listed on the Australian Securities Exchange, highlighted by elevated costs offset partially by higher revenues.
Anecdotally, there were concerns that costs were sticky in the near term and that puts profit margins at risk, particularly during the next financial year. This will be exacerbated if revenue growth loses momentum as the economy slows.
Albeit it is not all bad news. Earnings per share (EPS) growth expectations for the 2023 financial year fell by around 40 basis points during the profit season. In a typical reporting season,
it’s closer to 70 basis points, according to an analyst from MST Marquee (see chart above).
Investors quickly sold off stocks that announced disappointing earnings and missed market expectations.
A research note from a Goldman Sachs strategist observed that the buy-side expectations must have been low as ‘inline’ results were being bought by the market.
Our additional observation was that if these low expectations weren’t met, price action was volatile and widespread. Investors took little notice of the starting price-to-earnings ratio of the stocks which disappointed them. Of which, they sold down Domino’s Pizza as heavily as they did Downer EDI.
There were several key observations from the interim reporting season.
1) COVID still lingers in both the community and in reported numbers. The cost of labour and its scarcity are ongoing issues for many companies. Revenue figures in several businesses and comparisons to previous periods were still COVID affected.
2) Stress is emerging in some segments of property development where a consistent rate of settlements is needed to manage cashflows. Further, it doesn’t help that some of these businesses find themselves overleveraged by the current environment.
3) Consumers remain resilient, but there are early indications of a pullback in spending. Retailers missed their store roll-out targets. Although, it was difficult to ascertain whether it resulted from prudence or intransigence from landlords.
4) Finally, the power of operating momentum was apparent. Good assets get better, and turnarounds are hard. On the positive side – WiseTech, Goodman Group, and JBHiFi were some examples. In contrast, Domino’s Pizza, City Chic Collective, Star Entertainment Group and Downer EDI were companies that struggled.
For the Platypus Australian Equities Fund, the reporting season was positive and a slight improvement on the August 2022 full-year results season.
Regarding specific stocks, WiseTech, Endeavour Group, Reece, Pro Medicus, Lovisa, Goodman Group, PSC Insurance, and The Lottery Corporation delivered results above expectations.
Negative surprises were delivered by Pinnacle Investment Management and REA Group, reflecting tougher operating environments in their respective industries.
The good reporting season for the companies within the Platypus Australian Equities Fund means 2023 financial year earnings-per-share growth rose during the period, reflecting the positive results of most of the companies within the portfolio.
As the chart above shows, the Platypus Australian Equities Fund earnings-per-share growth outperforms the broader S&P/ASX300 Index.
Disclaimer: Issued by Platypus Asset Management Pty Ltd ABN 33 118 016 087, AFSL 301294 (PAM). This material provides general information only and is not offered, or intended to be relied upon, as financial product advice and does not take into account your individual objectives, financial situation, needs or circumstances. Prior to investing in any financial product, an investor should determine, based on its own independent review and such professional advice as it deems appropriate, the nature and extent of economic risks and merits, the legal, tax accounting characteristics and risk, and the consequences of an investment in the financial product. This material is not a financial product recommendation or an offer or solicitation with respect to the purchase or sale of any financial product. While every care has been taken in the preparation of this material, no warranty of accuracy or reliability is given and no responsibility for the information is accepted by PAM, its officers, employees or agents. PAM is part of the Australian Unity Group of companies.
Without limiting the foregoing, this material may contain estimations about future matters (including forecast financial information) which are based upon selected information known and assumptions made as of the date of this material. Such estimations are subject to risks and uncertainties and actual results may be materially different. Nothing contained in this material may be relied upon as a promise, representation, warranty or guarantee by PAM (or any other person, including any director, officer or any related body corporate of PAM) in respect of such estimations.