Reporting ensures stock volatility remains high

James Gerrish

Market Matters

A positive move from overseas markets last night however that took a while to sink in locally with stocks fairly muted early on. By 11am buyers were out and the mkt traded higher for the rest of the day, the IT stocks the standout as a more risk on vibe permeated through the ASX. Asian market traded mostly higher today while US Futures were down a touch during our time zone. .

Overall, the ASX 200 added +31pts today or +0.48% to 6471. Dow Futures are now trading down -70pts /-0.27%.

ASX 200 Chart

ASX 200 Chart


Stocks today: The table below looks at the share price performance of those companies that reported today. This week calms down with reporting pretty well wrapped up by Thursday. Today we saw big moves on both sides of the ledger, Nanosonics clearly impressive which Harry covers off below, while Inghams (ING) continued the poor run in the agricultural stocks, although I think the SP reaction was too extreme. IVE Group (IGL) which resides in the income portfolio reported reasonable numbers and the stock closed marginally higher.

Inghams (ING) – 17.08%: The poultry producer continued the run of poor results from agricultural businesses today with FY19 earnings missing expectations, however the magnitude of the share price fall was more a consequence of weaker guidance for the year ahead. The key takeaways came more from the operational / cost side rather than the demand side, with poultry volumes up +4.3% yoy to a pretty staggering 414.9k tonnes.

For FY19, EBITDA grew by +2.9% to $208.6m however that was below the $212m expected by the market while the profit line missed expectations by a larger margin. They sighted the impost of higher feed prices thanks to the drought while they also discussed poor results from a processing optimisation program that was desired to reduce costs, but instead, higher demand meant the new arrangements couldn’t cope and the opposite outcome occurred. In terms of guidance, the market was looking for +2% growth in EBITDA for FY20, however the company said EBITDA will be lower in FY20 before it rebounds in FY21.

While the result is a weak one, it seems the share price reaction is once again too excessive.

Inghams (ING) Chart

IVE Group (IGL) +0.48%: Full year results today confirmed a solid year for the integrated marketing business as they navigated through some external challenges (higher input prices), the integration of new businesses, the expansion of some facilities and finally the transition to a new CEO just ahead of these results.

While the FY19 financial metrics were a slight miss in terms of market expectations (only 2 analysts cover), the stock was seemingly priced for a weaker outcome. Revenue was $724.2m, a slight miss on the $730m expected by the market, however it showed growth of 4.1% ton FY18, some of which came from acquisition while +2.4% cycled organically. Group pro-forma NPATA came in line at $37.5m versus market expectations of $37.1m. No guidance was provided although they did reduce capex expectations resulting in a likely improvement in free cash flow. They announced a dividend of 7.7cps FF for the half, taking the full year payout to 16.3cps fully franked.

On 8x FY20 earnings and a yield of 7.7% fully franked, IGL will retain its position in the income portfolio.

IVE Group (IGL) Chart

Wesfarmers (WES) +1.06%; The new Wesfarmers – ex-Coles, BUKI, Quadrant Energy and others – reported its full year result today with what looks like a slight miss, although a messy set of number given the significant change in the composition of the business over the period.

The new group generates the bulk of its revenue from Bunnings which saw like-for-like sales grow 3.9% in the year. For most retailers this would be more than enough however given the track record of Bunnings often seeing LFL in the high single digits, this result missed expectations and the company said “moderated trading conditions are expected to continue.

Kmart saw no sales growth in the year, while Target saw LFL sales fall -0.8% with EBIT for the combined group down 16.7%. The discount department stores continue to come under pressure which led to the acquisition of Catch Group during the year, which will be rolled into the Kmart group to drive its e-commerce capabilities and sales. Officeworks, the smallest retail component of Wesfarmers, saw EBIT up 7.1% on +7.6% LFL sales growth for the year – a pretty solid outcome. Industrials, where Wesfarmers combine Chemical, Energy & Fertilizers with industrial & safety businesses saw EBIT growth of 4.4% with all growth coming from C, E & F. This area is considered the growth frontier for Wesfarmers. With a strong balance sheet, the company has made its acquisition intentions no secret.

Wesfarmers (WES) Chart

Reliance Worldwide (RWC) +5.76%; Plumbing parts manufacturer Reliance saw its shares rally today on an in line result. The company met the guidance they downgraded to in May on the back of a softer than expected American winter however some were questioning the quality of the result given the reasonable currency benefit the company received. The profit line was 80% higher than FY18, however this was mostly made up of the full year contribution of UK based John Guest. The integration of the acquisition is ahead of schedule, and synergy benefits were upgraded at the result by 50% to exceed $30m p.a.. Guidance for Reliance was mixed – NPAT guidance for FY20 was $150m-$165m, around 5% below consensus. EBITDA guidance, however, was marginally above the markets expectations of $284m.

The stock popped on the result, however currency benefits and a murky outlook concern us + we think the market remains too bullish.

Reliance Worldwide (RWC) Chart

Nanosonics (NAN) +32.65%; impressive day for Nanosonics on an impressive report. The ultrasound equipment disinfectant company saw profit more than double to $13.6m, a 39% beat to consensus. The company managed to add 18% to the total installed units, currently representing 17% of the market. Penetration in North America jumps to nearly 50% while progress continues to be made across Asia and Europe. The outlook may be even more impressive than the profit beat with the company aiming to match instalment growth in FY20 across each region as well as pushing upgrades into their new trophon2 product for existing customers.

Nanosonics continue to invest heavily in R&D as well as growth opportunities, and in the long run pushing to become the standard product for disinfecting probes.

Nanosonics (NAN) Chart

Caltex (CTX) -4.6%; a soft first half for Caltex out today but little surprises given the guidance released in late June. NPAT of $135m was 54% below the first half of 2018 with low refinery margins and the retail chain coming under pressure. In an attempt to salvage the full year they announced lower CAPEX and a review of underperforming stores. Refinery margins will recover, and so will retail, however neither are showing signs of a significant bounce at this stage.

They will need a reasonable skew to the second half to hit consensus estimates with less than 40% of the expect profit generated at the half year.

Caltex (CTX) Chart

Broker moves;

  • Codan Downgraded to Hold at Canaccord; PT A$4.30
  • Freightways Upgraded to Neutral at Forsyth Barr; PT NZ$8.30
  • Freightways Downgraded to Sell at Goldman; PT NZ$6.91
  • G8 Education Downgraded to Neutral at UBS; PT A$2.25
  • G8 Education Downgraded to Sector Perform at RBC; PT A$2.75
  • IOOF Holdings Upgraded to Neutral at UBS; PT A$4.85
  • Meridian Energy Upgraded to Neutral at UBS; PT NZ$4.80
  • Viva Energy Group Downgraded to Neutral at Macquarie; PT A$2.06
  • Japara Upgraded to Neutral at Macquarie; PT A$1.05
  • Mayne Pharma Downgraded to Hold at Wilsons; PT A$0.55
  • Perpetual Upgraded to Buy at Morningstar
  • Sandfire Upgraded to Buy at Morningstar
  • OZ Minerals Upgraded to Buy at Morningstar
  • Boral Downgraded to Equal-weight at Morgan Stanley; PT A$4.50
  • Boral Upgraded to Neutral at Credit Suisse; PT A$4.10
  • AMA Group Downgraded to Neutral at Evans & Partners; PT A$1.16
  • Ramelius Downgraded to Hold at Morgans Financial; PT A$1.12
  • MACA Upgraded to Buy at Hartleys Ltd; PT A$1.26

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6 stocks mentioned

James Gerrish
Portfolio Manager
Market Matters

James is the Lead Portfolio Manager & primary author at Market Matters, a digital advice & investment platform with over 2500 members that offers real market intel & portfolios open for investment. He is also a Senior Portfolio Manager at Shaw and...

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