Investment Matters

Profit Reporting Season: the ‘week that counts’

In this week's Investment Matters we have provided a brief synopsis of the enormous number of companies that the team either met with or had reported financial reports to the market this week.

Australian Equities sub-portfolio

earlypay logo

EarlyPay (positive result)

Company description

 

A longstanding position in client portfolios, Earlypay (formerly CML Group) is an invoice and equipment financing company that finances SMEs. It has grown its business over many years in a measured manner both organically and through acquisition.​

FY-21 result and read through for FY-22

 

Earlypay reported its FY21 results on Thursday, and the team look forward to catching up with the management team today. Earlypay is a large holding in clients' portfolios, and First Samuel clients own 14% of the company.

The highlights of the result included:

  • Profits that were better than previously guided ($8.7million NPATA up 13% on pcp)
  • Final dividend of 1.3cps, taking FY21 dividend to 2.3cps fully franked. This represents a 4.6% yield at current prices.
  • Strong rebound in operating performance in 2H21, including significant growth in client numbers and revenue per client. This growth also drove an improvement in margins.
  • Guidance for next year's profit growth (40%+) further highlights the value we see in our current position.

Our position in EarlyPay is a good example of our focus on companies that execute well, deliver long-term value-creation and generate sustainable cash flows at the same time.

Price reaction

From -2% to +2% average price traded this week

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Woolworths group logo

Woolworths (positive result)

Company description

Food and beverage retailer that operates over 1,000 supermarkets across Australia and New Zealand. The company also has a discount general merchandise exposure through Big W.

FY-21 result and read through for FY-22

 

A core position in client portfolios, Woolworths continued a 2-3 year run of exceptional results. Supermarkets displayed continued growth in sales and profitability in the final quarter of FY21, and strong momentum at the beginning of FY22.  As we have previously mentioned in Investment Matters, Woolworths appears to have responded to the challenges of COViD and become a better business than it was before.

A highlight was the final dividend (55 cps), and a larger than expected A$2billion off-market buyback.

All indications point to ongoing market share gains with the business benefiting from leadership in online, great execution in-store and a network of locations that have performed better than Coles through COViD.

The only downside to the spectacular appreciation in the share price this year is the fact that it is now relatively expensive, which will prompt some trimming of client positions.

Price reaction

+0.4% on the day of announcement

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intega logo

Intega (positive result)

Company description

 

Intega demerged from Cardno in 2019. It undertakes three primary activities: 1. Testing of materials used in construction to make sure it meets designer/owner and regulatory standards 2. Subsurface utility – mapping of location and condition of utilities under the surface (pipes, cables) to assist when conducting new construction/infrastructure projects. 3. Quality assurance for Energy companies.

FY-21 result and read through for FY-22

 

The company delivered its full year results this week, with pleasing performance in operating earnings, margins, and cash flow. The company provides construction material and environmental testing and consulting and engineering services across Australia and the US. We look forward to discussing the result with management in more detail in the coming weeks.

There are three core reasons why we own a significant position in Intega Group;

  • The business is performing well and is ideally positioned to benefit from the strong pipeline of infrastructure investment in the US and Australia
  • It has a strong balance sheet capable of supporting further acquisitions in the US 
  • It has a share price that represents a significant discount to the value of the cash flows the business can generate. The result this week only served to confirm this.

The majority shareholder (Crescent Capital, 54% stake) and the Board announced in June that it had commenced a strategic review to maximise shareholder value including by exploring ownership options for Intega. We await the outcome of this review.

Price reaction

+-2.0% on announcement, -1.0% this week

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Worley logo

Worley (negative result)

Company description

 

Worley provides engineering design services as well as procurement, construction project management, maintenance, reliability, support and advisory. This includes in oil and gas (hydrocarbons), chemicals, mining and metals. The company increasingly moving into renewables and applying its expertise to assist with the global energy transition that is underway. 

FY-21 result and read through for FY-22

 

Worley’s result was largely in line with expectations.

There were several moving parts when we looked under the hood.  Both the market in general and First Samuel as owners of a position in Worley, find the large numbers of “adjustments” and “one-off factors” presented in the result disconcerting.  Cleaner outcomes in the coming periods would assist us to realise the value we see in this position.

Procurement, fabrication and construction work (the ‘blue collar’ side of the business) was strong over the period and drove a lot of revenue growth. However, much of this work comes at smaller margins which dragged down overall profitability.

The company continues to see a delay in projects, which has pushed back some of its work to 2022.

In terms of long-run value creation, we remain encouraged that Worley will benefit from both the re-orientation of global energy markets towards renewable projects and the vast amount of infrastructure investment anticipated across the globe.

To achieve such an outcome over the next 5 years we need to see evidence of two key outcomes, a strong build in the backlog of work in growing markets and the delivery of cost-out programs in sectors with reducing demand. Both were evident in the result this week.

Price reaction

+-2.0% on announcement, -1.0% this week

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Lovisa logo

Lovisa (positive result)

Company description

 

Lovisa is an international fast fashion jewellery retailer. Its target market is fashion conscious females aged 25-45. It operates over 400 stores globally, selling low value, high margin items. The company is expanding globally (predominantly in Asia, Europe and US).

FY-21 result and read through for FY-22

 

The global fashion jewellery chain based in Melbourne continued to confound critics with a fabulous result this week.  Strong sales growth was achieved across the globe wherever stores can be open.

The demand the company is seeing for its product is providing increased confidence that its global expansions plans can continue at a good pace. The market is increasingly excited that the company could become a large successful global retailer (with 2/3rds of stores now outside of Australia). Such companies are rare in the Australian market.

Despite its robust growth plans, which can constrain many companies’ capacity to pay a dividend, the strength of Lovisa’s balance sheet enabled a 38c dividend to be declared.

Clients purchased their stake in Lovisa in the low $7 range, and although we have continued to trim the position as it rose, its share price finished the week at $20.00. The share price is at the top end of our valuation range, but the optionality it provides to the portfolio as a whole supports our current small position.

Price reaction

+-17.0% on the day of announcement

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Perpetual

Perpetual (follow-up meeting)

Company description

 

Perpetual is predominantly an investment manager (Perpetual Asset Management) which is expanding to have a global presence. Other business segments include Perpetual Private and Perpetual Corporate Trust which provide a range of services including financial planning, investment administration and custody.

Takeaways

 

The team met with CEO Rob Adam and CFO Chris Green early in the week to discuss last week's full year results. We remain impressed by the team's vision of global growth in funds management, along with the consistent performance of its core Australian assets. Exploiting decades of experience as value investors, and extending capacity in ESG investing through selected acquisitions, Perpetual is well-placed to generate strong profit growth in the US and Europe.

Price movement

+4.8% this week

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Origin logo

Origin Energy (follow-up meeting)

Company description

 

Origin Energy is an integrated energy provider that is involved in power generation, energy retailing (electricity and gas) and the production/export of natural gas.​

Takeaways

 

The team met with CFO Lawrie Tremaine this week providing a terrific opportunity to discuss details in the operations of Origin’s electricity business. Origin is navigating significant ongoing changes in the composition, structure and performance of the national electricity market (NEM).  As the nation's electricity market evolves to deliver better environmental outcomes, we see Origin being able to generate significant value from its unique set of assets, including its vast retail client base.  If they can execute such a plan there is a significant upside to the current share price.

Price movement

+2.5% this week

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RWC logo

Reliance Worldwide (positive result)

Company description

 

Reliance is a designer, manufacturer and supplier of water flow, control and monitoring products/solutions for the plumbing and heating industry. Its flagship products are push-to-connect fittings, pipe fittings (SharkBite, Speedfit) and associated piping. Sales are through retail (HomeDepot, Lowes) trade and wholesale channels. Major markets include US (main), UK and Australia.

FY-21 result and read through for FY-22

 

Reliance Worldwide spawned from its home in Brisbane in the 1950s is now a globally successful plumbing supplies business, with a high-quality brand in SharkBite.

Buoyed by the huge growth in global housing demand since Covid began Reliance delivered a fantastic result. With more than $1.3billion in sales, the group is fantastically profitable generating earnings after tax of more than $200million. The FY21 result was better than expected, with higher operating margins being the highlight.

We were especially interested in how the company responded to cost inflation pressures which were markedly higher in the second half of the year. The company successfully mitigated higher costs through price increases. Our discussions with industry contacts have highlighted the capacity this company had to successfully drive higher prices. We see significant enduring value in a quality company that has pricing power.

Clients first purchased their stake in Reliance in the low $3 range, with the company’s share price finishing the week at $5.68.

Price reaction

-4% this week, +40% this year

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Costa logo

Costa Group (neutral result)

Company description

 

Costa is a large fruit and vegetable grower. It produces berries, avocados, mushrooms, citrus and tomatoes and has exposure to domestic and international markets.

FY-21 result and read through for FY-22

 

The largest horticultural company in Australia, citrus, berry and avocado producer, and a major supplier of produce to food retailers reported its 1H21 results. The result was slightly ahead of forecast, but the market focused on the outlook statement, and confirmation the company remained on track to deliver the full-year performance previously outlined.

Costa confirmed expectations but the commentary pointed towards ongoing weakness in some key categories including avocado. The ridiculously cheap avocados we all see in the supermarket continue to depress earnings.

Our motivations for investment in Costa Group rely less on the short-term fluctuations in agricultural prices, preferring to concentrate on the long-term value Costa is generating through its investment in supply chains, product innovation, and cultivation technology. This result from its international assets in Morocco demonstrated the type of value Costa can create. We will continue to add to this position when the market is too worried about the short run.

Price reaction

4.4% on announcement, -0.3% this week

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Carbon Revolution logo

Carbon Revolution (positive result)

Company description

 

Carbon Revolution is an innovative manufacturer which utilises carbon fibre technology developed in Australia (Deakin University).  Produces carbon fibre wheels for performance and luxury cars – such as the Ferrari 488 Pista, 2017 Ford GT and Ford GT350R.

FY-21 result and read through for FY-22

 

It has been a challenging year for Carbon Revolution, marked by supply chain disruptions in the automotive industry and the cancellation of a large order from a key customer.

While these challenges were reflected in its first half result, with costs per wheel increasing along with working capital, the company instituted a turnaround in the second half.

The implementation of its new facia technology (the final, aesthetic carbon fibre layer put on wheels) saw costs per wheel resume their trend downwards, with similar costs achieved despite significantly lower volumes than the previous year.

It is looking to build inventory in the first half of FY-21, anticipating key large orders in the second half, and will look to commission its mega-line in FY-23.

The commissioning of the mega-line will mark a stepwise change in costs for the company, with the automation of existing manual handling processes, in conjunction with the industrialised workstations Carbon Revolution has developed.

A critical factor will be whether Carbon Revolution can win work on new vehicle programs to fully utilise the mega-line, which will drive down costs and open its technology for adoption in new vehicles and vehicle segments.

Risks remain, but with a recent capital raise completed (ensuring a runway for the company to execute), we see merit in retaining a small exposure to the company.

Price reaction

+9% on announcement, +12% this week

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Viva Energy logo

Viva Energy (positive result)

Company description

Viva is a fuel wholesaler, retailer and refiner. It provides fuels and specialty products (such as lubricants) to both retail and commercial markets: Retail operations include petrol stations (Liberty, Shell, Coles Express). Its commercial division sells fuel to aviation, marine, transport, construction and manufacturing sectors.

 

FY-21 result and read through for FY-22

Sometimes result announcements are more of a whimper than a bang, such was the case with Viva Energy. The critical news for this company was provided earlier in the year with the finalisation of the government support package for its refinery assets. Improving oil prices and domestic conditions were well understood.

The result released this week continued a series of results that were highlighted.

  • Strong capital discipline – a further buyback and capital return was announced – the company has returned a significant amount of capital over the last two years
  • Fuel margins softened but remain strong indicating the retail fuel market in Australia is “well-behaved” (read not so good for motorists)
  • Supportive conditions remain in commercial fuel demand and pricing
  • Ongoing disruption to the company's jet fuel business due to COViD as expected.

Price reaction

-0.5% on the day of announcement, -0.3% this week

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endeavour logo

Endeavour Group (neutral result)

Company description

 

Endeavour Group’s assets are better known to readers as Dan Murphy’s retail liquor network, BWS retail liquor assets (often co-located with Woolworths supermarkets) and the lesser-known ALH Hotel network of 332 hotel venues.

FY-21 result and read through for FY-22

 

Endeavour Group is the newly demerged business that emerged from the Woolworths Group, compromising the Dan Murphy stores, local liquor (BWS) and a vast Hotels business.  The share price is up 17% since it was first listed at the end of June and most of its operating performance was pre-released. The market was interested in understanding the impact of current lockdowns, movements in operating costs, and the outlook for expansion of the hotels network.

The news was mixed with significant uncertainty due to COViD, expensive closures across their network, and moderate to rising costs. The outlook for hotel network expansion remains upbeat with a preference to add small groups of hotels to their portfolio.

We see value in both the core business (especially Dan Murphy's and BWS) and its growth strategy in hotels.

Price reaction

-2.2% on the day of announcement)

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Platinum asset management logo

Platinum Asset Management Limited (negative result)

Company description

 

Platinum is an Australian based investment manager with a focus on international shares.

Flagship funds include Platinum International Fund and the Platinum Asia Fund.

FY-21 result and read through for FY-22

 

The result, released late on Wednesday evening, had a significantly poorer reception from the market than we would have anticipated. Part of the reason appears formulaic, the remainder prompted by a mixture of genuine concern and short-sightedness. Why?

  • The result presented profits that were ahead of expectations but only delivered through higher profits on owned investments, which are considered less sustainable than everyday profits on sales revenue
  • The shortfall in underlying profitability was due to higher employee expenses, a combination of performance payments to all staff as well as increased salaries to increase retention. Formulaically higher costs this year simply mean lower profits next year.
  • But unlike Woolworths which increases employee costs when sales are rising or Lovisa does so as it expands its network of stores, analysts and the market are not convinced Platinum can grows its revenue, or right-size its costs.

What are the determinants of revenue growth for Platinum? Fundamentally they relate to the ability to generate strong investment performance in global markets using the strategies that have served them well for two decades.  But today, many global share markets reward stocks that lose the most money, not make the most. Many markets assume that inflation is not possible, nor that interest rates could rise. These conditions do not favour Platinum.

We were interested in the Platinum commentary that noted  “We have been here before”. Also, that “Out of favour stocks can do well”, and contrarian positions are sometimes rewarded. We tend to agree.

The current share price is more than justified in a world in which Platinum continues to be on the wrong side of markets. Significant returns to clients from the position

Price reaction

10% on the day of announcement, -5% this week


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