Profit Reporting Season Update

The Markets

This week: ASX v Wall Street

This week’s Investment Matters will concentrate on key company results as the profit reporting season ramps up. Read last week’s investment matters.

FYTD: ASX v Wall Street

CSL (1H24 Profit repotting result)

This week was exceptionally busy for CSL, with both 1HFY24 financial results and trial outcomes announced.

The simple assessment for the week is that its core blood (Immunoglobin IG) business remains strong. Benefits from underlying structural growth in demand, executes well and retains a great market position that it uses wisely.

Representing more than 60% of earnings and a higher proportion of the overall value – the core is great.

Its execution in other business areas is suffering, notably in its recently acquired Vifor business (which has already been hit by the long-term effects of weight loss drugs). It is never a good thing to hear a company downgrading its expectations of a newly acquired business. However, some concerns may be justified. Vifor could already be seeing price erosion in its key intravenous iron products in certain markets.

Justifying a higher price than $300 per share requires Vifor, Seqirus (its vaccine business) and its future product pipeline to be very valuable.  

The product pipeline was the second blow for the week. CSL announced on Monday that its drug CSL112 had failed to meet the primary endpoint in its Phase 3 AEGIS-II trial.

CSL112 was the only remaining drug in development seeking to improve the function of HDL-C (“good cholesterol”) rapidly enough to prevent secondary (often fatal) heart attacks (MI: myocardial infarction) and/or strokes shortly after patients are treated and discharged following their first MI.

CSL112 was the next major clinical catalyst for CSL, so at this point, the challenge for the company may be to signpost clearly how the equity upside story develops from here. We did not have high expectations for CSL112 and included limited value in its once-vaunted drug development pipeline.

The CSL share price finished down 7% for the week.

CSL remains a huge part of the ASX Index, and clients own a small amount, benefiting from the opportunity provided by a recent sell-off. The more conservatively positioned a portfolio, the greater the requirement to hold a larger stake.

We will continue to be selective in our positioning in this stock.

“Our near-term estimates are largely unchanged in total but include cuts to both Vifor revenue and profitability throughout our model, and these drive our PT cut from AUD350 to AUD330. Nevertheless, we think CSL continues to represent compounding high teens earnings growth over the next three to four years with the main levers in the core plasma business working in the company’s favour, albeit with a sleepier catalyst set up post CSL112 failure earlier in the week” . – UBS

MQG FY24 Operational Briefing

Macquarie logo

Annually, Macquarie Group hosts an Operational Briefing (think Strategy Day), which updates on year-to-date trading performance as well as places the spotlight on a couple of their businesses.

Current trading conditions – very challenging

Profit in FY24 (March year-end) is substantially lower against an extraordinary, cyclical peak in FY23.

Given a challenging environment for M&A (10-year lows) and consequently asset realisations have meant that their annuity-style businesses (Asset Management and Banking & Financial Services / ~38% of income) were tracking lower in terms of earnings.

In Macquarie’s markets-facing businesses (Commodities & Global Markets and Macquarie Capital) profit is ‘substantially down on the pcp primarily due to exceptionally strong results in Commodities including Gas and Power in the pcp.

Business strategy – Asia and Banking and Financial Services

Both the Asian and the Banking and Financial Services franchises delivered polished presentations, highlighting very solid business performance over recent years.

Graph representing the growth of BFS net profit contribution

Each time we listen to Macquarie Group, we are reminded about the significant experience levels of their senior executives with the Group (typically 20+ years), the persistency of investment made across the business, the risk management capability and the robustness of the balance sheet.

We regard Macquarie Group as a best-in-class diversified global financial services company. It remains a high-quality, core holding in client portfolios.

Cartoon showing two soldiers

We are also increasingly viewing additional value in the company’s retail offer, especially the quality, pace of growth and future profitability of its mortgage and deposit business.  Driven by great product design, exceptional market segmentation, and brilliant technology, we anticipate this part of the business will attract further consideration from the market.

“A softer trading update reflecting current market conditions for M&A activity and asset realisations is disappointing. We expect ~4% downgrade to consensus FY24E NPAT. However, with the deal pipeline still looking strong and the timing of transactions likely to be pushed into FY25E, the medium-term outlook looks broadly unchanged. Furthermore, no change to the Commodities & Global Markets outlook despite low volatility and warm weather is likely to be seen positively” Barrenjoey

Seven Group Holdings 1H24 Profit Reporting       

We believe that Seven Group Holdings (SVW.ASX) is amongst the best business operators on the ASX. Management consistently executes well and is a great custodian of shareholder capital – buying under-appreciated assets while also choosing to sell stakes/positions when valuations look expensive. A long-run winning combination.

SVW delivered a very strong uplift in Group EBIT of 28%. The engine room of this performance was its Industrial Services assets.

Graph showing results from WesTrac, Coates, Boral etc

The businesses within this Industrial Services mix are as follows;

In each case, these franchises are the biggest participants in the markets in which they operate. While each has benefited from strong underlying demand from mining activity and infrastructure construction, an inflationary environment in the economy has allowed each to flex its pricing muscle, supercharging earnings growth.

Cartoon showing shop owner selling mining equipment..

Clients may recall that we first began accumulating SGH Group shares below $20, and that in turn we had been a shareholder in Boral before the takeover by SGH. As clients would also be aware, we maintain discipline concerning trimming positions when the share prices exceed our view of long-term value. With the recent run-up in share price we have continued to trim the position.

“SVW talked positively on the outlook for all three core sectors and noted that there is further operational upside for each of the three Industrial Services business units. The focus for now remains on organic investments and operational improvements. While balance sheet leverage has come down below target, the team is not focused on M&A for now”. Barrenjoey

SEEK Limited (1H24 result)    

Seek logo

A challenging employment market made finding revenue growth an elusive one for Seek during this period. Accordingly, revenue growth in the core Australian and New Zealand business fell 10% versus the pcp, albeit the group fared better in its Asian business (+2%), which was assisted by currency movements. EBITDA fell 11%, and the dividend was cut by 21%. Earnings guidance for FY24 was downgraded to reflect the more challenging revenue environment.

What did please us, was that:

1. Yields are strong and generation of Cashflow from Operations remains very strong at $130m

2. Cost control was excellent, with expenses held flat in the period despite ongoing investment in tech platform consolidation, which will eventually drive significant operating leverage

3. Market share in Australia/New Zealand improved and was held stable in Asia

The fall in earnings and dividend was met with a strong share price response (-4.6% on the day after initially falling by 10% intra-day).

We are attracted to Seek over the medium term due to two distinct opportunities its assets can provide.

  • One, we are concerned that the team is not doing enough work to increase the yield per advertisement. Higher yields naturally reflect both the underlying value of an advertisement to an employer posting the advertisement and the value of the marketplace/website the advertisement is placed on. Such yield improvement has been a more consistent outcome at and, and
  • Two, due to a weak culture, the company has not appropriately managed expenses as it grew.

We know that the volume of advertisements will rise and fall with the cycle. As such, when we see the company deliver strong expense control and higher yield, we know that patience concerning the cycle of volumes is likely to lead to a medium-term outcome that can sustain much higher margins and more valuable assets.

“Whilst the share price is likely weak on the FY24 guidance downgrade, if we look at the 3 key drivers: only volumes (the cyclical element) are weaker, but the two (more structural) elements that SEK can control – yield and costs – are actually better.” Barrenjoey

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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