Investment Matters

What Matters this week: XTX, Colette, A2 Milk & Treasury Wine Estates

The market shifted into reverse this week as further virus cases sprouted in Europe and abroad. Coronavirus COVID-19 fears have now hit a fever pitch, with Prime Minister ScoMo on the front foot (this time) on Thursday declaring a global pandemic.

The overriding impetus to sell meant that there was little green to be seen (surprisingly, even gold stocks were not entirely immune). By our count, only 14% of the index (All Ordinaries) was able to hold its ground (to close of market on Thursday). The pull-back has left the market (All Ordinaries Index) close to square (-2.67% without dividends 3.07% with dividends) for the financial year to date.

Mixed in with all the commotion was another week of company reporting season.

But before that, it is worth highlighting that last week we failed to celebrate the launch of our own mini-Nasdaq in Australia – the S&P/ASX All Technology Index, or XTX (in all of its palindromic, uber-cool ticker-glory). The index is now home to the WAAAXs and spans the impressive, the fast-growing and the not so.  We learned one thing about the index this week - at the very least, it has proven itself as a useful leading indicator. The bell was rung on Monday and the market immediately sank.

We also gave our condolences, as yet another retailer, Colette, disappeared into a black hole. It appears as if the trend in retail sales (down 0.5% in December on a seasonally adjusted basis) and household savings may be continuing: 

IMgraph2Source: ABS

Of course, the Corona question (various permutations of: how do you see the Coronavirus impacting sales/volumes/other in the second half?) was echoed by most analysts in earnings calls this week.

Furthermore, the decline in our currency over the past year and now at a close to post GFC low (AUD/USD $0.66) provided strong tailwinds to those with overseas earnings and put an Asterix next to a number of results, as investors looked to pull apart underlying revenue growth.

There were, however, few corona concerns expressed by A2 Milk (-1.3%). And it’s easy to see why: infant formula sales continue to push A2 Milk’s profitability, with the company’s half-year result beating revenue expectations (despite a high hurdle - growing by 32%) and net profit lifted by 21%. Furthermore, Chinese consumers are happy to purchase their formula from the confines of their homes (through online channels) – with sales in the second half (i.e. the Corona half) surprisingly tracking ahead of expectations.

Not so for Treasury Wine Estates (-5.9%) who have finally quantified the cost of the Corona crisis (after a significant downgrade to earnings a mere month ago). The bottom line: is less cases and caskets sold in China will equate to no growth in operating profit for FY-20 (vs previously guided growth of 15-20% - which is also due to lacklustre performance in the US).

With the ever-increasing appetite for data and a workforce consisting of over 400,000 people from around the globe, viruses were less of a concern for Appen. The crowd sourced data annotation company Appen (-16.4%), grew its revenue by 47% year on year (10% of this was currency related) and net profit by 32%. However, the result still disappointed relative to expectations.

Meanwhile, Ardent Leisure’s (-40%) rollercoaster ride has continued after the Queensland Coroner’s report revealed systemic failures lead to the death of four people on its "Thunder Rapids" ride. This comes at a time where the company's Theme Park business continues to struggle towards operating profitability. As several Chinese restaurant owners could tell you over the last few months, popular perception can linger longer than you can stay profitable.

Lastly, AMA Group (-48.9%) (panel beating network and parts supplier) revealed a huge dent in its earnings for the first half. Rising repair and operating costs, along with muted volumes shrunk operating profit to $21m. This means it will take a mighty second half for the company to achieve its target of $71m for the full year. It is fair to say by the market's reaction that there is some scepticism that this will be the case.