Investment Matters

Company News: Lovisa, Aurelia Metals, Lynas and Stockland

A string of annual general meetings this week along with a handful of quarterly updates continued the addendum we have seen to reporting season – with companies giving more frequent updates in the current environment.

Following on from last week, we were pleasantly surprised with updates from many of your companies. Reflecting on this, the drivers of these surprises varied, with some largely unrelated to the broader economic recovery. This highlights to us the importance of constructing a portfolio with multiple, relatively independent drivers, that goes beyond a simple “list of stocks”.

Australian equities sub-portfolio

Lovisa (positive impact) outlined a dramatic improvement in its sales in an update provided at its annual general meeting. The company’s share price ended the week to Thursday 10% higher.

Most stores in the company’s global network have been re-opened (save for stores in metropolitan Melbourne). Sales in the first 12 weeks of the financial year have fallen by -10% (compared the previous years, excluding Victoria). However, sales in the first 6 weeks were 20% lower. This implies that sales volumes have largely recovered to pre-covid levels in last 6 weeks.

This is encouraging, considering shopping centre traffic (as measured by footfall) is yet to recover and continued restrictions on social gatherings and functions.
Furthermore, the company has seen strong growth in online sales, which now constitute a meaningful part of sales (approximately 10%).

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Aurelia Metals’ (positive impact) report for the first quarter of 2021 revealed strong production, with costs tracking below what the company has guided towards.

The strength of production for the quarter was surprising and may imply that the company’s guidance for the full year is conservative.

There are also signs that the market is giving Aurelia more credit for the growth options it has available, with some brokers valuing its shares at levels around $0.80 (its current share price is $0.535).

We have always seen that the company is worth more than its current trading price and have a price target above $0.70.

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Lynas’ (positive impact) production for the September quarter surprised on the upside. Its share price ended the week to Thursday 11.6% higher.

Higher production volumes, pricing that has remained largely stable, as well as recent operating efficiencies have allowed the company to maintain positive cash flow. This is despite operating at 75% of planned production levels and weaker pricing post COVID.

The company therefore likely has ample balance sheet flexibility, given its recent capital raise, which will aid its growth ambitions as well as engagement with customers.
As we have mentioned, there is considerable global support for Lynas, being one of the few sources of global production independent of China. The prospect of constrained supply from China could lead to a bifurcated market – one where trade occurs between China and its allies and another for the rest of the world. This would have a dramatic impact on pricing, given China’s dominance in the production of rare earth minerals.

We were reminded of this possibility over the weekend, with China’s top legislature passing a law on export control – allowing the government to ban exports of strategic materials.

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Property sub-portfolio

Stockland (neutral impact) held its AGM this week and provided an update to the market. The focus was largely on sales within its master-built communities – which have significantly benefited from government incentives, the lower interest rate environment and de-urbanisation.

The company completed 1799 sales in the first quarter – the highest it has seen in three years, despite restrictions continuing in Melbourne. While activity began to slow in September, the company has seen stronger enquiries in October and expects a strong finish to the year.

It expects stimulus measures to continue and flagged the possibility of benefits flowing from further stimulus measures enacted by the Victorian government.