Investment Matters

What Matters this week

And during the final week of company profit reporting season ...

There were some positive signs from the retailers, with Adairs Group (+7.1%) posting results that were largely in line with expectations (albeit weak overall due to the weakness of our currency and growing pains in online sales) and signalling a healthy start to FY20 (with comparable sales up 4.8% in the first 7 weeks of FY-20).

Meanwhile CityChic (+10.5%) collective delivered 12.2% comparable sales growth (a shift towards online sales and higher prices) and growth in underlying operating profit (+25%), although this didn’t quite translate to its cashflow statement without a lot of caveats (primarily around its divestment of brands to Noni B mid last year).

Noni B’s comparable sales growth was also strong, although like-for-like sales have slumped as it delivered results in line with its guidance (with underlying operating profit +22% - but again complicated by the transaction with CityChic).

Inghams (-24%) reported poultry profits (yes, we’re picking the low hanging fruit pun this week).  This was on the back of a poor performance from its New Zealand segment (which came under pressure from competition, farming costs and higher feed costs), lower wholesaler pricing and higher processing costs.  The outlook isn’t looking so great for the second half of the year either, with feed costs continuing to weigh on performance.  The 'short' interest for the company remains mighty high (at approximately 20% of its shares outstanding).  This may reflect some scepticism around its numbers, given the company listed out of private equity (and the shenanigans we have seen in past private equity listings). Its majority shareholder, private equity firm TPG, did progressively sell down its holding before the announcement.

Flexigroup (+25%) under new CEO Rebecca James is simplifying, consolidating, but not growing (in terms of profit - yet).  Headline numbers were still ugly as the company begins instituting a turnaround.  The main headline drawn from the result was the reveal of a ground-breaking buy-now, pay-later solution.  The company will partner with Mastercard to provide a service (called bundll) that can be used with any merchant, as opposed to Afterpay et al. who provide a solution that can only be used with participating merchants (not that Afterpay shareholders took notice – with shares in the company up 19% for the week).

The grey nomads have not come out to rescue recreational vehicle rental and distribution company Apollo Tourism and Leisure (0.0%).  The company continues to languish in a challenging market for vehicle sales.  Apollo, recently downgraded its guidance for net profit (to flat or down on last year) to $18.5m (at the midpoint) in May which was less than prophetic, as it delivered underlying net profit after tax of $14.7m.  While rental revenue remains strong RV sales (both new and ex-fleet) have languished in North America and Australia.  It has now lost over 45% of its market capitalisation since May.

A signpost for some of the froth we are seeing in the “growthy” end of the market this week was Nanosonics (+25.8%).  The healthcare company, which produces a patented device used to disinfect ultrasound probes, shot up by 25% this week after announcing its results.  The company, which is up 81% this year, currently (as at Thursday afternoon) has a market capitalisation of $1.9 billion and produced a net profit of $13.6m. Whatever way you cut it (even after assuming its new, yet to released device is mightily successful), it is very hard to get these numbers to make sense.  But it wouldn’t be the only fast-growing company we could say that about at the moment.

There was a lot going on in Speedcast’s (-54.4%) result and almost none of it was good.  A presentation that began by addressing the company’s challenges did not get any better: announcing the loss of (a) the company’s Chairman, (b) a board member and (c) CFO.  The company has debt, a lot of it, its recent acquisitions have failed to deliver and its underlying business is shrinking (plus the gap between operating earnings and operating cashflow widened materially this half).  Hence the auditors comment that if it is unable to execute on its plans (as it has not been thus far) there is “significant doubt as to whether it will be able to continue as a going concern”.  $6.60 a year ago is now $0.75.  Add this one to the list of failed roll-ups.

Boral (-11.4%) was given the old Chicago cement shoe treatment, after signalling next year’s net profit after tax will be 5-15% lower than the current year's as the housing market in the US and Australia remains un-accommodative.

Lastly, founder Ruslan Kogan (+8.3%) and Director David Shafer decided to offload some more shares ($21.7m and $8.3m respectively).  Readers will recall the last time the duo offloaded shares was in June of 2018, before announcing a material slowdown in its Global Brands revenue in October of that year (and the subsequent 33% drop in Kogan’s share price). This time the sales were post announcement of its FY-19 result, which was (unsurprisingly) positive.  Their reason for selling: “to diversify a portion of their investments” and to provide existing “impressed” shareholders with the “opportunity to increase their ownership levels”.  Issues: a) Mr Kogan does not strike us as a risk averse individual.  Their actions might imply the “risk” is in the company’s current valuation.  b) Why couldn’t these existing shareholders that were “impressed” with the performance of the business buy on market like everybody else (which would have benefited all shareholders …).

Note: Prices movements represent movements for the week to Friday morning.

- Paul Grace