Reports on a table with a magnifying glass on top

Profit Reporting Season – Week 2

© 2024 First Samuel Limited

Read last week’s profit reporting summary.

The Markets

This week: ASX v Wall Street

FYTD: ASX v Wall Street


Inghams (1H24 result)

Inghams chicken company logo

Like a tray of chicken offcuts sitting outside on a hot summer’s day, Inghams was ‘on the nose’ with investors when we began accumulating stock in early 2023. Challenges finding workers and rising cost of feed and CO2 had created some challenges. However, as the largest supplier of chicken in the Australian market and given its status as a lower-cost protein at a time of constrained household budgets, we were confident about the revenue (and share price) prospects of the company in the latter part of the year. This thesis has proved correct.

First Samuel impressions

The results announced a 9% revenue growth versus 2% unit volume growth (1% in Australia and 9.5% in NZ), which highlighted the benefits of a strong market position in an inflationary environment. Even better was the 66% growth in EBITDA, 108% growth in NPAT and 167% growth in dividend!

Rising in-home dining in the retail channel helped drive sales (unit sales growth of 9.5%) and a recovery in earnings in New Zealand, after a period of significant disruption, helped drive the large uplift in EBITDA and after-tax earnings.

A graph representing the Core poultry volume change vs PCP in Australia and New Zealand

Inghams had risen to become our largest position in clients’ Australian shares’ sub-portfolios portfolio. Accordingly, we had begun to take profits in the lead up to the result. Nonetheless, we were surprised by the extent of the pull back in the share price on the day of the result (12.5%), despite the result being a force for consensus earnings estimates to be lifted. 

Sometimes the market just expects too much from a company result and it was a reminder why we need to take profits on winning positions.

A humorous cartoon that has two Chickens talking to each other with a speech bubble that says: It's steady work but there are rumors of a glass ceiling

Our medium-term focus on this investment is supported by our detailed analysis of the results, our view on long-term margins and discussions this week with its the management team. The current sell-off may provide an opportunity to add to our position.

“The share price sell-off clearly makes the Inghams risk/reward from a valuation perspective more attractive. The stock is trading at a FY24 P/E (ex-AASB) of 12x vs. 14x LT average. This is despite Poultry market fundamentals having never been stronger, i.e. industry structure very favourable & solid Poultry value proposition vs. pink/red meat. The key issue that keeps us sidelined is the sustainability of Inghams’ EBITDA/kg. We highlight 1H24 EBITDA/kg of A$0.57c/kg was the highest the company has ever delivered in its history. To get more positive on the stock, we would require greater evidence that this level of profitability is sustainable and potentially can even be increased in line with the company’s target of reaching EBITDA margins of >10%”  UBS

QBE      FY23 Profit reporting result       

QBE logo

QBE is one of the leading commercial insurance companies in the world and has been a core portfolio holding for many years. Given our general concerns about the growth and return outlook and, accordingly, the valuations of the major Australian banks, we have held QBE as a source of financial services sector exposure.

Global insurance is highly technical, and its accounting is equally finely tuned. The complexity creates a set of unique financial indicators that provide analysts and investors with a clear picture but one that is difficult to put in narrative form.

To add to the complexity, much of the variation in earnings will relate to irregular weather events, crop yields, and natural disasters outside the company’s control (known as catastrophe or “cat” claims). The factors within the insurers’ control relate to the level of risk exposure (not the outcome) and the expected costs of insuring events rather than the actual costs. At this level, QBE’s performance continues to excel; it controls the controllables and manages the risks.

This led to a result that showed higher investment returns and stronger ROE (return on equity), which delivered higher dividends. The Combined Operating Ratio (the cost of providing the insurance, including claims made) fell from 60.5% to 59.1%, leading to higher pre-catastrophe profits. The Combined Operating Ratio also decreased (profit rose) after including the “cat” claims.

A series of 4 graphs that compare fy 22 and fy23 these graphs are
1. combined operating ratio %
2. Investment return %
3. Adjusted ROE %
4. Dividends per share (A$ cps)

First Samuel impressions

The progressive de-risking of the portfolio and rising interest rates earned on it’s insurance reserves are progressively lifting ROE, adding to earnings predictability and allowing for higher dividends.

We believe that the market is still undervaluing the quality of the earnings outlook QBE is providing, despite the more than 42% return delivered since June 2022 (vs 24% for the market as a whole).

In a global inflationary cycle and given an environment where catastrophe claims are increasing, insurance premium inflation must remain elevated. The QBE result showed robust premium growth. This growth will underpin future profitability.

“QBE’s result demonstrated a company benefiting from favorable operating conditions, but not able to leverage that environment while portfolio exits and reducing earnings volatility plays out……….However, it is using this opportunity to strengthen its large catastrophe allowance, de-risk the portfolio and ultimately deliver less volatile earnings.” Barrenjoey

Reliance Worldwide Corp            1H24 Profit reporting result       

Reliance Worldwide Corp logo

The most pleasing results delivered by our portfolio companies so far have come from Reliance Worldwide. As a homage to the market psyche, the reason it was so pleasing, other than the 20% plus increase in the share price, was that it didn’t disappoint, for disappointment had been a matter of course at results announcements for the past four years.

Despite good overall performance for these four years, the reaction to results day has always been poor; the company tends to be dour in presentation style, overly cautious in outlook, and deliberately covert in strategy. They prefer to let the results do the talking and to let markets evaluate it’s strategic decisions rather than strategic prognostications.

As a reminder, Reliance Worldwide is a leading US, Australian and UK firm in designing, manufacturing, and supplying high-quality, reliable and premium branded water flow and control products and solutions for the plumbing industry.

Reliance’s products include the famous SharkBite brand of push-to-connect plumbing equipment.

During the past six months, the company has continued to acquire well, and a good deal of the growth and value we see in the business relates to their ability to continue to grow the stable of products they produce and market globally.

Cartoon commenting on the RWC reporting. Text on the cartoon reads product called 'SharkBite' With the service clerk saying' it was going to be 'lethal snake venom' then their assistant saying 'it was close'

Globally, sales have slowed in the building construction sector, and apprehension regarding the impact on short-term profitability was heightened before the results.  

Instead, Reliance reported a resilient 1H24 result, given the volume declines experienced in its three key geographies. Management had aggressively tackled its cost base, driving strong margin performance in the Americas. New product releases are performing well.  With end-markets potentially stabilising later this year and new product initiatives underway, RWC is well-placed for an eventual upturn in the cycle.

It has long been our view that the market is too focused on the short-term movement in their markets. Too little focus is given to the resilience of demand for Reliance products used in the R&R (Repair and Remodel) sectors. The company stressed this again in it’s results, highlighted in the following diagram.

RWS earning profile due to R&R exposure

Throughout the Americas and EMEA (Europe, Middle East, Africa), more than 75% of demand is repair and remodel. In the absence of severe recessions, this demand is resilient, whilst New Build suffers from well-understood cycles.

As one of the largest positions in the portfolio, we continue to see this position as attractive.

Management’s focus on cost control has helped margins remain relatively resilient against a falling volume environment. Volumes remain key and, once the cycle turns, the upside from the operating leverage should flow.” UBS

Woolworths        (1H24 result)      FY24 reporting

Woolworths hit the headlines this week with an inauspicious appearance on Four Corners it ended the week with the announcement of a new CEO, Amanda Bardwell, and a stock sell-off of 8 per cent for the week.

Cartoon of woman at a computer with a speech bubble that says 'Mr Banducci has been discontinued'

With an ongoing focus on supermarket pricing, inflation, and profits from a range of inquiries, including from the Senate, the short-term outlook for supermarkets is challenging.

During analysts’ presentations this week, we were conscious the company may have been pitching its story to the government and the public more than to the investment community. The pressures on the business and the areas facing higher competition were highlighted, whilst the factors driving higher profits were skirted over.

When a company is sustaining such attention, we always focus on the long-term drivers. We have already taken the opportunity to lighten our position when the stock was trading 15-20% higher. Regarding relative positioning, we are underweight (less investment than the average weight) in supermarkets in general.

The long-term question remains our focus – is Woolworths a better business today than it was 6 and 12 months ago? Despite the fall in share price, we believe the company is, on balance, better positioned for the medium term.

Why better positioned? Let’s look at the positives and negatives.

The negatives
  • CEO Brad Banducci resigns. We were privileged to meet Brad in his first week in the role in 2016 and were impressed by his focus on detail and his humble approach to culture and service. Woolworths has historically been prone to hubris and belligerence, and we hope Brad’s values remain past his departure.
  • Government and regulatory oversight. While we are confident that Australian supermarkets deliver an excellent value product to consumers, their market power is negative for producers and landlords. Whenever politics get in the way of business policy, there are risks of unintended consequences.
  • New Zealand. The supermarket business across the pond is structurally weaker than the Australian market, and it currently underperforming below expectations.
  • Inflation is slowing, yet the business faces ongoing increases in costs. This has not affected margins, but a keen pace of business improvement will be required to keep pace with costs.
The positives
  • Adjacent businesses – Woolworths, over the past six to ten years, has developed an impressive set of adjacent businesses that leverage the scale and capacity of the core businesses. These include:
    • Digital, technology and analytics-enabled platform businesses delivering value for Woolworths Group and partners. The businesses include Cartology, Quantium and Primary Connect.
    • PFD Food Services, a wholesale B2B business approved by the ACCC in 2021 and now incorporated into the existing Woolworths B2B business, generates $4.6+bn of sales and more than $140m in operating earnings.
  • The most important innovation centre has been WooliesX, which houses the company’s online offering and the Rewards program. Woolworths Rewards is going from strength to strength, with higher usage, richer data, and a more integrated user shopping experience. The new CEO, Amanda Bardwell, has been rewarded for its success.
  • The switch to online from store-based shopping.  All our proprietary research has suggested that the online business was on the verge of producing significant profits. For many years, as each shopper moved to purchasing online, Woolworths’ profit on that sale dropped dramatically. The lower profits were driven by deliberate investment in growth and innovation because of the smaller scale of the online business (including click and collect).  This has rapidly changed, with the 1H24 results highlighting the profit growth in these businesses now outpaces store-based profit growth. Given the huge runway online supermarket growth possesses, we are confident that in the medium term, online profit margins will exceed in-store profitability.
  • Markets for advertising, data and building a market for other sellers.
    • Amazon has taught the world the value of operating a marketplace where direct customers can meet and provide an option for others to sell their wares. Woolworths is now building a solution for a business called WoolworthsMarketPlus.
    • Facebook has taught the world that simply hosting locations (in Woolworth’s case, both physical and online) provides the opportunity to manage the data and advertising potential created directly. Woolworths is now also exploiting these advantages, expanding margins by selling of advertising capacity instore and online, and through the sale of its customized data. This is a new source of higher margins which do not come directly from higher shelf prices.
  • Inventory and supply chain efficiency. On several occasions, in Investment Matters and the monthly CIO Video, we have noted the value Woolworths derives from securing exceptional trading terms. These terms reduce the amount of capital invested in the business, increase returns and fund future growth. The most impressive, long-term-focused detail in it’s results presentation was the continued growth in Return on Funds Employed (ROFE), up from 14.2% in 1H23 to 15.7% in 1H24.

Balancing the positives and negatives,  the difference between short-term or cyclical weakness and uncertainty vs long-term structural growth is clear. Structurally, Woolworths is stronger than ever.

Cyclical weakness can impact short-term profits in supermarkets. When a business as large as Woolworths faces weaker sales growth (for instance, from lower prices or less inflation), it can be difficult to run faster than a range of costs, including labour, input prices and broader inflation. The share market is acutely aware of such a trend. The following chart produced by a leading supermarket analyst Craig Woolford (MST Marquee) shows the Woolworths share measured in relative terms against all industrial companies (dark blue line, higher indicates relatively higher price). The aqua columns show the Woolworths comparable sales growth, the higher the column the stronger the per store sales growth across the network.

show the Woolworths comparable sales growth

The trend is clear, when Woolworths has weaker sales growth, the market worries about short-term profits pushing the relative prices of Woolworths shares lower.

With ongoing focus from government, slowing inflation and a new CEO, our long-term position in Woolworths will remain smaller in size than medium-term target levels.

“The 1H24E was pre-guided yet the shape of the core Aust Food division and concerns about sales gth with CODB pressures to continue, as well as ongoing questions on the outlook for NZ Food & Big W, weighed on investor sentiment and drive UBSe EBIT lower. Further, the Aust Food industry is facing multiple regulatory reviews (Senate enquiry, the scheduled food and grocery code of conduct review, pricing & competition review by the ACCC), while the retirement of CEO Brad Banducci, who is well regarded, was unexpected, or at least earlier than expected. Despite our confidence in the Aust Food division, we recognise these challenges make share price outperformance less likely, hence we reduce our valuation and downgrade our rating to Neutral..” UBS

Imdex Profit Reporting (1H24 result)     

Imdex is a smaller company and portfolio position, but offers exposure to a global market leader in mining exploration technology.

We purchased the stock in 2023 after the company had raised capital to fund the acquisition of its largest global competitor, Devico, which was a privately-owned company based in Norway. It cemented the company’s position as a dominant player across major mining geographies.

Since the acquisition in Feb 2023, conditions for junior miners, the most active users of Imdex’s solutions, have been challenging. Rising finance costs and tighter liquidity, as well as in some cases, falling commodity prices, have seen junior miners pull back on drilling activity, with global mining exploration budgets estimated to have fallen 3% in CY24. In this respect, Imdex’s acquisition of Devico has assisted Group performance by diversifying geographic spread (less reliance upon Australia and Canada), enhancing opportunities for cross-sell as well as offering opportunities for cost reduction from product and corporate center rationalisation.

First Samuel impressions

Imdex strategic highlights

We were really pleased with the revenue growth, achieved in a tough environment, as product penetration increased. Improvements in cashflow conversion (to 84% from 71%) and reductions in gearing levels were also highlights.

“When the exploration cycle returns to a growth phase, we see potential for a substantial P/E multiple re-rate well away from that low-end of Imdex’s historical range. Whilst we acknowledge there is still some uncertainty in exploration markets, the key data and leading indicators that we track have shown a consistent sequential improvement since the lows in April/May-23. In our view, this likely sets exploration markets up to return to growth in FY25.” UBS


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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