Coles’ margins tighten, Iluka guides higher

Brad Potter

Tyndall AM

Last week saw Coles report a result that met expectations, but the supermarket retailer's outlook commentary was met with a tepid market response reflecting a challenging operating environment.

By contrast, Insignia Financial and Iluka Resources announced results that caught investors by surprise (positively!), with both companies well-placed moving into FY24.

With the end to the August reporting period fast approaching, inflation, labour shortages, weakness in China and the Ukraine war continue to weigh heavily. So where to now for Australian markets?

Brad Potter, Tyndall AM’s Head of Australian Equities, gives his take in the final episode of the August 2022 4-Minute Monday podcast.


Stewart Harris: Hi and welcome to the final episode of 4-Minute Monday for the August reporting period. Joining me to share his observations is Brad Potter, Tyndall’s Head of Australian Equities.

Brad let’s start with the Coles result. We all know that food price inflation has been burning hip pockets at the supermarket checkouts. What did we learn from their full year result?

Brad Potter: The consumer staples names such as Coles, Woolworths and Endeavour all entered the reporting season with very strong share price performances and lofty multiples. Results met expectations, however their outlook statements didn't and therefore they all fell significantly on result day and on the days subsequent.

Coles earnings outlook is quite challenging at the moment, with inflation on food prices starting to result in shoppers trading down. Sales were a little weaker than Woolworths and cost growth is accelerating due to industry-wide pressures. Coles also have some cost pressures going forward related to the implementation of their new distribution centres in 2023 and 2024, which will also impact earnings.

Many of the trends such as cost pressures, shoppers trading down, and trying to maintain margin in this difficult period are industry-wide. Shoppers are not accustomed to prices moving so quickly, and thus it may take time for them to adjust, and possibly helped by increased wages. Going forward the sector looks a little bit challenged despite normally doing quite well during these inflation periods.

Stewart Harris: Insignia Financial – formerly IOOF – reported a standout result that was well received, with shares closing up 11% on the day. What caught the market by surprise?

Brad Potter: Insignia reported an underlying profit that was up 58% year on year and 5% above consensus. The synergy benefits with the integration of the ANZ and MLC acquisitions are now coming through well ahead of schedule. IFL is now guiding for greater synergies to be realized over the next few years, which is extremely positive.

There is still a long way to go on the integration front, but so far, the signs are very positive. Excluding pension payments, platform flows are now improving, and this is partly helped by better pricing and improved products. The stock had significantly underperformed into the result and thus the beat on earnings, together with the better outlook on flows and synergies, resulted in strong performance on the day.

Stewart Harris: Thanks Brad. Turning to Iluka, the company’s half-year release saw a big jump in mineral sands revenue and earnings on the back of strong zircon and high-grade titanium pricing. How did you see the result?

Brad Potter: The Iluka first half result beat market expectations on both the EBITDA and net profit line due to several one-offs. However, the underlying operating result was still very strong. Iluka provided strong guidance for pricing in both zircon and titanium dioxide, as supply side constraints and very low global inventory levels continue to put upward pressure on prices. Cash flow was very strong during the half and the company reported net cash of $600 million on the balance sheet.

The company now is in a period with strong profits and cash flows and a wonderful pipeline of new projects, including the start-up of the new rare earths project in WA that is being largely funded by non-recourse government debt. Therefore, the future looks bright for the company.

Stewart Harris: We’re almost at the very end of this reporting season. How are you seeing the outlook for markets and the environment more generally?

Brad Potter: The market still seems caught up between trying to price a rising interest rate and inflationary environment and alternatively, a recession and thus a falling interest rate framework.

Inflation is being exhibited everywhere, albeit many of the cost inputs have started to roll over and therefore we may find some relief in the months ahead. Labour shortages are a global issue and are being exacerbated by absenteeism with sickness. This is putting strain on many businesses and was called out often during reporting season. There really is no near-term solution for this at present.

Weakness in China and the impacts of the Ukraine war still weigh heavily on the market. China's busily trying to stimulate, however energy prices in Europe are at extraordinary levels with many industries shuttering due to these increased costs. This is likely to get worse moving into the Northern Hemisphere winter and is something to monitor carefully.

The valuation dispersion remains at extreme levels and thus we expect the high P/E growth firms to continue to de-rate. We really are still only in the early period of this bubble deflation that may have years to run given how long the bubble inflated driven by the global super easy monetary policy. Our expectation is for these underlying issues to continue.

Stewart Harris: Well that’s it for 4 Minute Monday for August! Thank you to everyone for taking the time to listen in, we hope you’ve enjoyed this series. We’ll be back in February for the next instalment; until then, stay invested.

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Throughout August, I will publish my thoughts on all the biggest news from reporting season, including a look back on the week that was, and the things to look out for in the week ahead. Hit the “follow” button below to stay up to date

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Brad Potter
Head of Australian Equities
Tyndall AM

Brad joined the business in 2002. He has 28 years’ experience primarily in the funds management and stockbroking industry, and has overall responsibility for managing the Australian equities team, process and portfolios. Prior to joining, Brad was...

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