MARCH 2024 – ISSUE 20
H1 Reporting Season 2024

The H1 Reporting Season 2024

High Valuations – are no barrier to companies exhibiting strong earnings growth, share prices followed earning revisions higher.

H1 2024 Reporting Season – Summary

H1FY24 was a benign reporting season with no downward revisions to the FY24 expected EPS growth vs. negative ~100bps this time last year (average of negative ~70bps historically).

The Banking sector results/trading updates contributed positively with lower Bad and Doubtful Debts (BDD). The revenue environment for the banks has held well, above expectations. Effective cost control was evident in an overall inflationary environment.

Outlook comments appear to be cautious, excluding anything AI related. There are expectations that a tough 6-12 months would need to be navigated before experiencing an easier operating environment which may be supported by potential interest rate cuts in key geographies and additionally in Australia, tax cuts.

We saw continued M&A in the building materials sector with takeover announcements for CSR Limited, Boral Ltd and Adbri Ltd during January and February.

There was strong interest in themes driven by AI adoption. Data centre operators and developers in particular were well supported.

We saw a nascent conviction returning in some beaten-up industries. Lithium and office real estate in Sydney & Melbourne, have begun to see some renewed interest.

Regulatory risk for the non-discretionary retailers became increasingly evident. Both Coles Group Ltd (COL) and Woolworths Group Ltd (WOW) are facing senate enquiries into grocery retailing with accusations of profiteering. Certainly, both WOW and COL are cognisant of the focus that is on their businesses. Interestingly the greatest contributor to the performance of the ASX 300 index in February was Wesfarmers Ltd (WES), the owner of Bunnings, after WES reported strong earnings aided by improvements at K-Mart.

In terms of developments in the Responsible Investment area the long-term mega trend of reducing carbon emissions continues to play out. Companies generally maintained shorter term carbon reduction targets and longer-term net zero targets, often with these in the process of being ratified by the gold standard, the Science Based Targets initiative (SBTi).

From the perspective of reporting, companies are preparing for Australian Sustainability Reporting Standards, which begin for large companies from 2024.

Gender diversity continues to be reported by companies, with some companies measuring themselves against targets for all seniority levels in the company. Safety records were mixed, with injury rates in the non-discretionary retail sector increasing. Cyber security investment continues to grow, with companies cognisant of the increased business risk from this space.

The Platypus Experience

At Platypus we invest in companies with forecastable earnings growth – both cyclical and structural – in a high conviction manner. One of the themes that developed in the H12024 reporting season and reflected in the Platypus Australian Equities Fund was that companies that exhibit strong earnings growth saw their share prices follow earnings revisions higher. This theme was not limited to structural growth stocks but also with selected cyclical growth stocks.

Within the Platypus Australian Equities Fund the following are examples.

Structural Growth Stocks

Goodman Group (GMG).

Is an owner, developer and fund manager of industrial property assets with a pivot towards data centers, these being very sought after real assets.

GMG remains focused on less than a dozen cities with strong fundamentals – tight supply and strong demand from e-commerce (e.g. Amazon) and hyperscalers (e.g. Amazon Web Services; Microsoft Azure).

GMG retains a capital light model with funding done in partnership with large global asset allocators (e.g. Canadian Pension Plans).


Cochlear Ltd (COH).

Remains the global leader in treatment of profound deafness with cochlear implants and bone anchored hearing aids.

Benefits for pediatric patients are well known and COH is now making progress in raising awareness on the importance of treatment in adults – deafness and linkage to dementia.

COH has <5% market penetration amongst the adult cohort, a long runway for growth, with double digit revenue growth in the medium term and a stable 18% NPAT margins.


Xero Ltd (XRO).

Is a leading provider of accounting, payroll and payments platform for SME’s and accountant/bookkeepers.

XRO now has a more focused approach under the new management – focused on ANZ, UK and US and with increased efficiency.

This is a large addressable market, allowing a long runway for growth.

XRO retains sustainable pricing power, with the ability to charge more for the value delivered to users.


Cyclical Growth Stocks

Reece Limited (REH).

REH is the No.1 plumbing wholesaler in Australia with a large opportunity in the US to build a similar sized business over the long term.

Currently the execution is impressive – with a range, service and price that is unmatched for plumbers.

REH’s consistency is remarkable – we have visited a dozen stores in the last year (US and Aus) – presentation, staff quality, engagement and energy stands out.

The US has approx. 230 stores which we expect will grow profitably at 10-15 stores p.a. in the near term and then at a faster rate for the foreseeable future.


James Hardie Industries plc (JHX)

Fiber Cement (FC) continues to take share from vinyl and brick in the US in external cladding of houses. This gives a long runway as US housing stock ages. There are 40m houses in the US that are over 40 years old that will need new cladding in the foreseeable future.

JHX is the leading global FC manufacturer. Bottom-up execution (i.e. management of manufacturing capacity, extracting efficiencies, management of distribution channels, building of brand awareness etc.) has been strong. Margins have improved from a sustainable range of 20-25% to 25-30%.


Seven Group Holding Ltd (SVW)

SVW own the dealership for Caterpillar in WA and NSW, Coates Hire nationally, 30% of Beach Energy and a ~70% stake in Boral Ltd and stake in Seven West (media) – the business is in strong competitive positions.

SVW has a strong track record of operating and turning around industrial businesses.

SVW has a defined investment universe – there is less risk of SVW doing something random under the new management and has a well-defined criteria for capital allocation.

We believe the valuation is still compelling at a 15x market consensus earnings multiple which is in line with the market.  


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