Equities

We met with the senior company management of several of our portfolio holdings during the June quarter in both Australia and the UK. The key highlights of those discussions included meetings with Adelaide Brighton, Brambles, CSL, Healius and Resmed.

Adelaide Brighton (ABC) 

Adelaide Brighton CEO Nick Miller commenced in late January, amid a slowing residential housing market and an increasing cost environment particularly for energy, which resulted in the revision of 2019 earnings expectations in early May. 

Miller is focused on operational efficiency assisted by the application of technology, diversifying energy sources and reducing the carbon intensity of its manufacturing operations, growing its lime business and increasing the vertical integration of its extensive cement and aggregates businesses. 

The re-election of the federal government, recent expansionary state budgets, RBA monetary easing and the rally in the gold price have improved the outlook for ABC’s end markets since the May downgrade. 

Resmed (RMD) 

The trends of RMD’s third quarter look to have continued, whereby the result showed a recovery from the disappointment of the second quarter amid strong growth in the US for its sleep apnea devices, masks and its healthcare software businesses. 

Uptake of Airview wireless connection is increasing patient engagement and adherence to therapy, reducing costs and increasing efficacy. Resmed is now a leading “connected health” company with more than 5 million cloud-connected devices for daily patient monitoring. 

New mask releases have been well received and a new generation of CPAP devices should be released over the next 12 months, based on the historic replacement cycle. 

CSL (CSL) 

CSL’s influenza vaccine company (Seqirus) is the world’s second largest influenza vaccine business. Seqirus is key partner with the governments of Australia, UK and the US in pandemic preparedness and response. 

CSL’s influenza business has undergone an extraordinary transformation since it purchased the Novartis (loss-making) influenza business in 2015. CSL’s heritage of forensic detail and planning has driven an impressive turnaround in the P&L of the Seqirus business, taking it from c.USD$245m loss in FY16 to an expected EBITDA profit of over USD$200m in FY20. 

Seqirus is a global leader in developing cell-based vaccines, which has shown to be more effective than egg-based vaccines in targeting seasonal flu. The core opportunity for Seqirus is growing both volume and price in its FLUCELVAX & FLUAD products. 

Brambles (BXB) 

For 1H19 Brambles was a beneficiary of solid top line momentum delivering c.7% growth. Each of its core regions posted positive operating trends. Interestingly, our visit to Brambles’ UK operations in June suggested that there had been a noticeable slow-down in global supply chains, particularly in Europe. 

Ongoing uncertainty over Brexit and rising trade tensions with the US and China have both negatively impacted consumer sentiment and business investment. Notwithstanding this, Brambles continues to benefit from favourable price and mix composition in its largest markets of the US and Europe. Competition is rational with higher lumber and transport costs largely being passed through to the customer. 

Greater use of automation in its US businesses should also aid cost containment. The recent divestment of its plastic container business (IFCO) underpins a large buyback program (c.12% of issued capital) that should support the stock through FY20. 

Healius (HLS) 

In the 18 months that Malcolm Parmenter has been CEO of Healius he has set about restructuring, re-capitalising and re-branding the organisation and its businesses, while its key pathology market has experienced soft market conditions and the company received a take-over offer from major shareholder Jangho. 

The execution of investment, asset rationalisation and efficiency initiatives remain far from complete but some key metrics such as GP recruitment are improving materially. While financial results are yet to show the impact of the changes, we look forward to further developments in cost reduction and some improvement in market conditions to boost margins and financial returns




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