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Confessions of a corporate earnings season

The Markets

This week: ASX v Wall Street

FYTD: ASX v Wall Street


Confession season – Bring out your dead

Most ASX-listed companies in Australia have a June fiscal/financial year-end. Some have a December year-end. Accordingly, those with June and December balance days will tend to present their (half-year/annual) financial results to the market in each of the months of February and August.

For some companies, however, reporting season is not met with confidence or comfort by its executive and board. If a company:

  • is unable to meet market expectations of earnings;
  • has a change of accounting policies/procedures;
  • is restructuring/reclassification of its business segments/earnings; or
  • has a significant write-down of valuation of its assets

then it will typically come out in the period prior to releasing its results and provide clarity on the situation. This serves to:

  1. discharge a company’s continuous disclosure requirements
  2. clear some space so that on the day the results are released, the conversation can be more on what the executive team wants to focus.

In Australia, the ‘confession season’ as it is commonly known, usually occurs in the last week of January as well as the final week of June.

Confession season – January 2024

As investors, this period also typically presents as a bit of a nervous time. Which of your portfolio holdings might make its way to the market quicker than expected? Alternatively, does a surprise announcement for a non-portfolio company provide an opportunity to pick up a stock at an acceptable price?

We discuss some of the companies that announced a little earlier than anticipated this January.

Nanosonics is an Australian medical services company that manufactures high-level disinfecting devices used to clean a range of instruments and other items used in medical procedures and investigations. It has a multi-national presence, but its largest market is the US, where it sells and services most of its devices.

The company’s Trophon device sits alongside ultrasound machines throughout the world. In the US, more than half of all ultrasound machines have an accompanying Trophon device.

The company is also developing a new device, named Coris, for the cleaning of endoscopy probes (which may be used for conducting gastrointestinal examinations (e.g. colonoscopy).

On 23 Jan, Nanosonics released “H1 FY24 trading update and expectations for the remainder of FY24

Within the ASX release, the company noted “the pipeline for new installed base and upgrades continued to grow, however timeframes to conclude sales increased, resulting in lower capital sales than expected. In particular, this saw the Company experience softer than anticipated upgrade sales….”

  • Global total installed base is expected to grow by approximately 3.4% in H1 FY24
  • Trophon upgrade of 620 units in H1 Fy24 down 22.5% on pcp
  • Growth in new installed base of 1,100 units in H1 FY24, with growth down 13.4% on pcp
  • Profit before tax of approximately $4.9m for the half compared to $11.4m (57%) in the prior corresponding period

Clearly, this is a disappointing development in the near term.

On a broker-hosted conference call in which we participated, the CEO downplayed the potential that market share was being eroded in any meaningful way or that new competitors had developed an alternate category-killer offering. So too, the CEO stated that there was still scope to increase market share, despite Trophon being the market-leading offering. 

Instead, the message was that this was largely a timing issue, notwithstanding that hospitals have clearly been taking a more conservative approach to managing their finances. Still, the company noted, that a new order for 173 units had since been delivered, with revenue recognition for this falling into 2H24.

Unsurprisingly, the investment community was disappointed with this development. On the day of the announcement, the stock price responded, declining 33%.

First Samuel’s thoughts

Having followed the company for many years, we believe in its innovation and the quality of its manufacturing capability. When the company delivers its formal result on 26 February, we’ll be listening for confirmation about the potential for continued market share expansion. Does the growth story remain intact?

***

On 29 January, Woolworths made an ASX release ”F24 HY Results significant items and trading update

Key terms of this release included

1. Two significant items relating to the:

  1. NZ$1.6 billion non-cash impairment of the carrying value of the New Zealand reporting segment, where EBIT for the H1 F24 period is expected to be 42% below the pcp; and
  2. change in accounting treatment for the Group’s 9.1% investment in Endeavour Group

2. A trading update, noting that despite a more challenging half for New Zealand Food and BIG W, where H1F24 EBIT is expected to be materially below the prior year, Australian Food and PFD’s financial performance has remained solid.

Group unaudited EBIT growth for H1 F24 before significant items is expected to be in the range of 2.8%-3.8%.

In response to this update, the stock price was flat on the day.

First Samuel’s thoughts

Large companies like Woolworths frequently make similar adjustments, given the diversity and size of their businesses.

The operational performance of Woolworths domestic food and grocery business appears to be in solid shape given the headwinds of their NZ operations and the BigW business.

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Bapcor is a wholesaler and retailer of consumer discretionary goods in the automotive sector. Its best-known brand is ‘Autobarn’, but it also operates businesses under the ‘AutoPro’, ‘CarParts’ and ‘SPRINT Auto Parts labels. Its wholesale business includes Burson Auto Parts.

We have followed the company for almost a decade since listing in April 2014. It is a high-quality franchise with more than $2.0 billion in sales. It has successfully grown both organically and through acquisition for many years.

There has been significant turmoil in the past two years at the management and board levels. The market had looked poorly on several of the changes.  Emphasis was placed on the concerns at the board level.

As clients will appreciate from our experience with United Malt, we see market opportunities in companies with great assets and weak management. Great assets tend to outlive poor management or weak boards so long as other owners are naturally interested in owning them.

Recent changes in the CFO and weak updates have provided an opportunity to begin building a position in the stock. This is in full knowledge that further negative news would emerge, but I also am confident that this news would already be expected by the Market and be included in the price.

On 29 January, the company issued a ‘1H24 Trading Update’.

The market was disappointed that 1H24 NPAT was expected to be between $53-54m versus $62m in the pcp (down 13-15%). This fall in profit was attributed to weaker performance in their Retail businesses and higher finance costs.

In turn, the Group CFO has also finished up with the business, in a move designed to take accountability for the disappointing operational performance in recent halves.

After a disappointing 12 months for the share price, the management shake up was taken as a positive signal of intent. In turn, there was increased speculation in the market that suitors (likely private equity) may emerge for the company. Accordingly, the share price responded positively, climbing 6% in response to the earnings disappointment.

First Samuel’s thoughts

And finally in the beginning of February the market received word that the Chairwoman and CEO would also be departing. We, and the market, view this favourably.

We didn’t expect the mantra that good assets tend to outlive weak boards and management to come to fruition so quickly, but nonetheless see the possibility that Bapcor will prove a quite profitable position in the medium term.

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