Five Sector Observations From Reporting Season

James Rutledge

James Rutledge

Portfolio Manager
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While we saw some strong company results posted over reporting season, it is fair to say that the macro view remains unclear with the Ukraine conflict, another Omicron wave and supply chain inefficiencies continuing to impact on margins. And with rising inflationary pressures and higher interest rates seemingly inevitable, portfolio manager James Rutledge believes there are plenty of factors for investors and their advisers to consider as they conduct their post-profit season review. 

Perpetual’s Australian equities team spent much of February and early March analysing those listed companies that reported on their performance over the quarter or half year to 31 December 2021. Results were generally strong, with better-than-expected revenues somewhat offset by lower margins and much higher than expected working capital. Here are a few sector and stock trends we see:

Banks, insurers are quiet achievers

The major banks produced a better-than-expected start to reporting season, with NAB and CBA beating market expectations. These two majors clearly have the most momentum in the market and accordingly are priced at a premium. On the other hand, Westpac and ANZ are struggling to grow. General insurers have had a tough time of late with weather events and subsequent concerns around higher reinsurance and natural perils. Despite this, we noted that the major insurers are making headway in pricing to improve long-term performance. One standout was Genworth Mortgage Insurance Australia, which returned to profitability in the first half of fiscal 2021 and continued to benefit from a benign claims environment. The company reported negative claims for the year, meaning the release of provisions was greater than what the actual claims were. 24c of fully franked dividends were declared and we see further opportunities for capital management ahead.

Nick Scali leads retail charge

Nick Scali remains our preferred retail pick. Despite months of lockdowns in Melbourne and Sydney and widespread supply chain disruption, the business saw a much-improved performance in the second quarter with all stores reopened by mid-November and the Plush brand contributing strongly. While electronics and furniture retailer Harvey Norman Holdings delivered an excellent result, comfortably beating broker expectations, the company remains a complicated beast with several moving parts. JB Hi-Fi posted a solid result compared with last year’s record half-yearly profits and was above market expectations and in line with guidance given by the retailer in an update in late January. We also noted the company’s strong balance sheet and decision to commence a $250 million off-market buyback. 

Building beyond Covid

We were impressed with the Fletcher Building result as part of what has been a great turnaround story. The company exceeded its own profit guidance last year, posting its full-year result just as all non-essential construction sites throughout New Zealand went into lockdown. The company is talking very positively about returns going forward and expect to see 10% margins in FY 2023. Their ability to take costs out of the business has been noted and, more impressively, they have stuck to this strategy with great discipline. The Australian business is still challenged, and we think now may be a good time to move those businesses on, but the New Zealand business is in good shape. There remains plenty of momentum and demand for building work coming through the pipeline.

China outlook improves for A2 Milk

A2 Milk's shares surged higher following the release of its half year results, which we believe show the brand is healthy and heading in the right direction. For the six months ended 31 December, A2 Milk reported a 2.5% decline in revenue over the prior corresponding period to NZ$661 million. Within this, however, the performance of both China label and English label products were better than expected. The company’s outlook for 2H22 revenue has improved and suggests to us that A2 is through the worst of its issues. The brand’s China label also achieved good growth in the tier two and tier three cities. We’ve noted that the CEO is willing to step up the marketing investment now that top-line sales have started to turn positive. So, we still like this one, even though the path to recovery will be uneven. Excluding the losses in MVM and the US business, with some return of the lost English label sales, we don’t think the stock looks expensive. 

Orora’s glass half full

Orora is a sustainable packaging and visual solutions provider, which delivered an excellent result underpinned by its US distribution business. Management indicated they pushed up pricing 13 times in the last 18 months and the benefits of a new ERP system are starting to flow through. With a strong foothold in the design and manufacture of packaging products such as glass bottles, Orora also showed an ability to offset the impact of China’s tariffs on wine bottle volumes. They have successfully replaced this lost volume with other glass demand from the likes of olive oil bottles. Cans continued to show good growth and the company is continuing plans for manufacturing expansion in partnership with key customers.



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