Extreme reactions abound

In the latest episode of Navigating the Noise, I sit down with Daniel Moore and Gavin Butt to discuss how extreme reactions to relatively run-of-the-mill results have turned this into a very volatile reporting season..

In the full podcast we discuss:

• The main takeaways from reporting season
• The key results we think investors should pay attention to
• How IML’s holdings have performed
• And how our future outlook has changed with what we’ve learned in the past month

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Lightly edited transcript – Recorded on 22 August

Gavin: Hello and welcome to Navigating the Noise, a podcast by Natixis Investment Managers Australia, where we bring you insights from our global collective of experts to help you make better investment decisions.

My name is Gavin Butt, and today I’m joined by Hugh Giddy and Daniel Moore from IML, portfolio managers for IML’s flagship fund, the IML Australian Share Fund. August is always a big event in every investor’s diary, and it’s a very busy time for Australian fund managers. So we are very grateful to Hugh and Dan for taking the time to give us their take on reporting season. Hugh and Dan, welcome.

Daniel: Thanks Gav

Gavin: Guys, this is your 35th reporting season working together, including August and February reporting seasons.

Hugh: Big number, huh?

Gavin: Of course. It’s a mixed bag of results every time you go into reporting season for individual stocks and I know things aren’t finished, but what’s your overall take on reporting season so far?

Daniel: Well, Gav, I think it’s fair to say it’s been very volatile. We’ve seen some very large moves from stocks, from quite small earnings beats or misses relative to broker forecasts. But I think overall you’d have to say markets are being pretty optimistic about the results. The market, as we speak today, is up three and a half per cent. The banks are up very strongly, with the exception of CBA (ASX: CBA); the other banks are up 10 to 15 per cent, and resources in general are up around eight to ten per cent. The lithium stocks are up more, reflecting some optimism about the future of China. Retail stocks are also up roughly 10 per cent, mainly on the back of rate cuts and the optimism around that. So yeah, a pretty optimistic view of reporting season so far.

Gavin: In reporting season, there are often a few key results that paint a picture of how things are going in the economy as a whole, both here and overseas. What has stood out for you?

Hugh: I think what stood out to me has been how weak the US consumer has been. I think around the world, you’ve seen consumers trading down; supermarkets and other stores have often said how people are buying more private label or might be buying fewer items but spending less overall. In the US, in particular, housing has been very weak, with James Hardie reporting an absolutely dreadful result, and Reliance as well, showing US housing is very weak.

Gavin: So looking at stocks in your portfolios, what have been the disappointing results for you so far?

Daniel: Yes, CSL (ASX: CSL) definitely, certainly a disappointing price reaction, being down 16 per cent for the month so far. For us, the result was a little bit disappointing; I think our forecast we cut by three or four per cent. The share price reaction was obviously savage; the market is probably concerned about the outlook for competition. They did lose a couple of tenders which impacted their revenue growth outlook for the business, and people are worried that’s going to lead to more competition for other tenders going forward. Fortunately, we’ve spoken to the company post-result, and they’ve had another 120 tenders since the loss of those two tenders, and price competition has been very rational. So we definitely think the share price reaction is extreme, and the company is still forecasting double-digit earnings growth into the medium term.

CSL now trades on a valuation equivalent to Westpac (ASX: WBC), NAB (ASX: NAB), IAG (ASX: IAG), and even Mirvac (ASX: MGR), the apartment developer. So the valuation to us looks very appealing for a business growing double digits.

I guess probably the other one we’d point out is Amcor (ASX: AMC), down around 8% currently. The result missed by about 2% on weaker packaging volumes in the US, which is really in that quarter post the announcement of tariffs from Trump, leading to a bit of de-stocking at the consumer level. Again, the outlook for the business is double-digit earnings growth, and the stock trades on a valuation multiple around ten times earnings. We remain very comfortable with the outlook for the business and its valuation; it’s a very solid business.

Gavin: On the flip side, you’ve had some very strong performers. What has worked well for you?

Hugh: Yes, it’s been pleasing. Some major positions have done exceptionally well for us. I suppose the major standouts have been Lottery Corp (ASX: TLC), where they’ve had a poor run of jackpots in the current year, but the normalisation of the jackpots in the coming year is likely. They have introduced some new games, such as Friday Night Lotto, which is going well, and they put in a price increase, which shows that they have some pricing power.

Daniel: Yeah, I think it was 16.5% for Powerball.

Hugh: Yeah, that’s a big, big price increase. Normally, that doesn’t cause a major dent in player frequency. The other exceptional result was Brambles (ASX: BXB), which, like Lottery Corp, has very good cash flow. Brambles has improved their business such that they lose fewer pallets and can offer a better deal to customers who do the right thing for the pallet pool. They are generating good cash flow in what’s quite a weak consumer environment in the US. Amongst somewhat smaller positions, Charter Hall Retail (ASX: CQR), a collection of neighbourhood shopping centres, did very well. They have tenants that renew regularly and are very focused on cash flow, which is a weakness for a number of property trusts, isn’t it, Dan?

Daniel: Yeah. I mean, their maintenance CapEx is extremely low, and the rental uplifts on renewal of leases were over 5% for the year.

Hugh: Which is very strong, and there were also strong results from ResMed (ASX: RMD) and Suncorp (ASX: SUN).

Daniel: Yeah, we’ve had a few. It’s been interesting. I think in general, going back to Brambles, we thought it was a good result, but the stock was up 12%. It’s just been quite an extreme reporting season, both on the upside and the downside, depending on the result.

Gavin: So looking ahead to the rest of the year, how has your outlook changed, if at all, and what have you learned in reporting season?

Hugh: I think overall valuations are high and the market is at records, so of course we are cautious to make sure that the company’s fundamentals are solid and backed by valuations in our portfolios. The thing I would highlight out of reporting season is those cost-of-living pressures you are seeing in the US and the impacts of tariffs still to come on what it does to people’s ability to spend because of the higher prices.

I’m not sure inflation has gone in Australia, but Australian spending has been sustained, arguably because the government has been spending and hiring. The public sector has been growing while the private sector has struggled a bit. However, it has been shown for many retailers that sales have held up because of those government jobs.

Gavin: Well, thank you, Hugh and Dan. We appreciate your time, particularly at such a busy time of year, and thank you to all of our listeners for joining in today. If you enjoyed the episode, please join us again to hear more from our global collective of experts.

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