Company Profit ‘Reporting Season’

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The Markets

This week: ASX v Wall Street

FYTD: ASX v Wall Street

Note: not all clients hold all of the securities we discuss.

The second substantive week of company reporting season kicked off last week. We provide some of the more relevant company result takeaways:

  • Lend Lease
  • CSL
  • NAB
  • Seven Group
  • Inghams

In coming weeks of Investment Matters we plan to return to discuss a range of other results from this week including;

  • HomeCo Daily Needs REIT (HDN) – pleasing operational and financial result. The company is well placed for multi-year lower volatility growth. Owned in Property sub-portfolios.
  • Mirvac Group (MGR) – improving outlook in an otherwise under pressure sector. Owned in Property sub-Portfolios.

Seven Group Holdings (SVW FY23 result)           

Seven Group Holdings is one of our favourite companies given it:

  • has a portfolio of assets with leading market positions (including Caterpillar, Coates, Boral)
  • offers access to some key structural growth thematics (eg energy transition, infrastructure and mining production)
  • excellent cashflow generation and a history of stable to rising dividends
  • has an executive team which executes effectively with a focus on delivering long term shareholder value

Figure 1: Strategic Sector Exposures

Source: Company reports

FY-23 was an excellent year for the company, with each of its three key businesses firing. Management continues to deliver on key promises, including reducing leverage (net debt to EBITDA) to below 2.3x, a year earlier than targeted. And Coates has already met its 2025 target for returns.

Figure 2: Great execution leads to favourable operating performance

Source: Company reports

What the market said

“FY23 EBIT a beat on both guidance and consensus (+3%), with FY24 EBIT growth outlook underpinned by core industrial operations at WesTrac, Coates and Boral. Strong cash and de-leveraging.” (UBS)

Inghams Group (ING FY23 result)                         

Patience and a commitment to invest in companies that ultimately benefit from inflation was rewarded with the FY23 results of Inghams Group. Hit hard by operational impacts during covid and again buffeted by rising costs associated with the Ukraine war, there was low expectations in the market for Inghams.

Despite some evidence of rising prices from supermarket surveys, the market wasn’t convinced that all the price rises would be passed through, especially considering the concentration of supermarket owners and major fast-food buyers.

The result delivered on every line item and the company’s share price rose more than 15% on Thursday, following the announcement. Revenue was better than expected, as was underlying profits, margins, and outlook, but the most important result was the selling prices achieved.

The price rises seen in the fourth quarter of FY23 provide confidence that the average prices for FY24 will be substantially higher than FY23, providing additional profit leverage on a very large, majority fixed cost base.

Figure 3: Net Selling Prices, by quarter

Source: Company reports

We had also expected that in addition to prices firming, the company would be able to move volumes away from the lower prices wholesale channel to the retail channel. The result shows this occurred, providing additional impetus for future earnings, as the market is becoming tighter (demand>supply).

Tighter markets see less volume in the wholesale channel.

From a longer-term perspective (Figure 2) it is important to note that the relative price of chicken remains low. In a tougher environment for retailers, there may be further switching to chicken over the next 1-3 years.

Figure 4: Long-run chicken prices finally begin to lift

Source: Inghams Group

Inghams still faces elevated input costs. The long-term soy and wheat price chart is shown and Figure 3 and remains at a high level since the Ukraine war. Any moderation in these prices in FY24 will add to the capacity for Inghams to increase margins.

Figure 5: Input prices remain high

Source: Inghams Group

We remain attracted to the industry dynamics at current prices levels, despite the rise.

What the market said

“Inghams FY23 result conference call had a decidedly more positive tone from management about the operating environment. The company acknowledged that momentum exited FY23 even better. There is some noise on depreciation accounting changes coming given grower contracts, but the fundamentals of a tight market with higher prices is good for margins. To reiterate upgrades of 5%-10% to EBITDA seem likely for FY24e..” (MST Marquee)

Lend Lease (LLC FY23 result)                   

Lend Lease management and board have been placed on notice. In the past 12 months, two activist shareholders have emerged on the share register. Each has brought with it a plan for improved returns which broadly involves

  • scaling back its lower returning construction activities
  • divesting satellite, non-core real estate businesses
  • headcount and broader expense reduction

We’re backing in these shareholders to instil the drive for significant change within a company which is currently delivering EPS below levels of a decade prior.

Figure 6: Portfolio Management Framework.

Source: Lend Lease

Figure 6 above demonstrates why the construction operations, the heritage business within the Group, is today being de-emphasised within the Group strategy. However, the construction business is required in order to facilitate the improvement in returns within the Development and Investments divisions.

What the market said

“Guidance for FY24 ROE of “low end” of 8-10% target was above cons OEPS of 76-77cps today, but we understand from management that it includes profit on sale of communities (100% of gain, B*e 1.2x book). LLC also did not provide divisional targets for Construction, Investment and Development, a departure from FY23. For FY24, we forecast a development ROIC of 10.8% (target 10-13%), an Investment ROIC of 5.2% (target 6-7.5%) and construction margin o 2.1% (target 2-3%). We assume the sale of communities (EBITDA $200m), completion of Barangaroo South ($275m) and $60m of cost-out taken to the P&L> For FY25, we assume 38% sale of Military Housing ($225m), the remaining cost out ($15m of $75m), and Hayes Point impairment ($78m).” (Barrenjoey)

CSL Limited (CSL FY23 result)               

CSL has been a long-term investment market favourite since listing in 1994 at a price of $2.40 (stock split-adjusted $0.76). However, since broadly doubling in share price (again) in the year leading up to the outbreak of Covid-19 when the stock hit a price of $336, the market has been more tempered in its enthusiasm and has allowed the expanding earnings base of the company to ‘grow into’ the high share price.

Representing ~5% of the ASX200, it’s absence as a core Australian shares sub-portfolio holding has meant that the stock has been one of our biggest active positions in terms of market tracking error (e.g. how our portfolio tracks the broader index/market performance).

Utilising a strongly valued share price as currency, the diversification of the CSL business beyond its core blood products into Flu vaccines (Sequirus) and Renal/Iron-based Therapy (Vifor) has been something which the market (and this investment team) has required some time to be convinced on.

Figure 7: Continued improved returns from Blood products expected

Source: CSL

Figure 8: Positive outlook – all key divisions are expected to deliver strong growth in FY24

Source: Company Reports

With the share price having retraced 20-25% from the peak, we think the share price reflected fair value for the 3 major divisional businesses. We also feel there is upside to current share price levels in order to reflect success within some of the R&D pipeline pertaining to three main products

  1. CSL112 (intraveneously-administered blood plasma product being developed to reduce cardiovascular problems);
  2. HemGenix (the first and only gene therapy for the treatment of adults with hemophilia B who have current or historical life-threatening bleeding, or have repeated, serious spontaneous bleeding episodes); and
  3. Garadacimab (CSL’s investigational first-in-class monoclonal antibody being developed as a long-term prophylactic treatment for patients with hereditary angioedema (HAE)

What the market said

FY24 guidance stands strong as FY23 NPATA hit top end of guidance fair and square. The update saw management confirm our previewed results, and provide key insights into:

  1. The breakdown of Behring’s Gross Margin recovery, aligned with our analysis of i) scale efficiencies; ii) HEMGENIX/GARDA; and iii) yield/efficiency interventions closing the donor fee gap (never quite falling back to what they were) within 3-5 years; and
  2. The Vifor acquisition plan, which we are back to considering may have been about CSL112 all along now we are within 6m of AEGIS-II data.  

We have made slight model maintenance changes where Seqirus/Vifor upgrades offset some near-term caution on Behring margins (base-frac assumptions and IDELVION/HemG estimates trimmed). Our sum-of-parts valuation disaggregates to: a) $262.50/sh (US$178.50/sh or 18.8xFY24e EV/EBITDA) for core Behring/Seqirus/Vifor earnings; and b) standalone ‘risked’ valuations for three R&D assets: CSL112 ($46.54/sh; un-risked $147.54/sh), HemGenix ($14.94/sh; un-risked $19.92/sh) and garadacimab ($18.52/sh; un-risked $37.04/sh). Un-risked valuation developing between now and 2026 is assessed at $467 per share.” (Wilsons)

National Australia Bank (NAB)           

NAB 3Q Results – 15th August

NAB is a September balance bank, so it is ‘out of cycle’ to be reporting financial results at present. However, it and other banks are required to release quarterly ‘Pillar 3’ Regulatory Risk and Capital disclosures as part of their reporting requirements. In doing so, the banks use the opportunity to provide a brief trading update.

What the market said

“NAB delivered $1.9bn in Cash NPAT during 3Q23, which was broadly in line with consensus. NIM fell a further 3bp in the quarter to 1.72%, while loan growth was flat (weaker corporate). Markets revenue remains strong. Costs are a pressure point, up 3% in the quarter. Asset quality is showing signs of deterioration, as should be expected at this stage of the cycle. The positive was a $1.5bn on-market buy-back returning some excess capital generation.” (Barrenjoey)

“The trends which NAB have reported for Q3 23 are consistent with what we have seen so far at CBA and Bendigo. Earnings declined ~1% QoQ on UBSe, with NIM during the period down 2-3bps (similar run-rate to CBA), while overall asset quality trends and credit impairment charges are coming in better than expected. NAB remains well provisioned with CP/RWA of 1.47%, with headroom to consensus on credit impairment charges on implied Q4 23E. Consensus NIM expectations might need to moderate down, but the current run rate in earnings would suggest NAB is on track to deliver on Q4 23E cash earnings expectations, which is necessary given its higher rating relative to peers (ex-CBA). NAB’s $1.5B buyback (~30bps on CET1) is a positive surprise and reflects NAB’s view economic data is in line with expectations with no surprises for now.”

The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.

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