Six companies that have caught my eye in reporting season

Roger Montgomery

Montgomery Investment Management

The COVID-19 pandemic, and associated lockdowns, have impacted some businesses very positively but been less kind to others. These impacts are coming to light in the current FY21 reporting season. Here, I’d like to highlight the results of six companies I’ve been following for a while.

Accent Group Ltd (ASX: AX1)

Accent Group owns and operates footwear chains and retail businesses such as Vans and The Athlete’s Foot.

Accent’s FY21 result and outlook were typical of many of its discretionary retailing peers; FY21 revenue was in line with expectations but pressure on margins and confirmation of more intense competition and promotional activity in early FY22. Lockdowns on the east coast are seeing like-for-likes (LFL) turn negative in the early months of FY22.

The gross margin improvement of 30 basis points for the full year was much lower than the first half suggesting second-half margin growth was negative. Lockdowns have seen LFLs fall 16 per cent year over year. CEOs are doing their best to talk up a strong inventory position ahead of Christmas, but it also means promotional activity will have to continue to move stock in an environment where consumers have been locked down for most of the past year and have purchased most of what they need and want. In July and August EBIT has been detrimentally impacted to the tune of $15 million.

Obviously, activity can rebound quickly when lockdowns end.

Redbubble Limited (ASX: RBL)

Redbubble is a global online marketplace for print-on-demand products.

Redbubble’s FY21 result came in slightly below consensus forecasts and because Redbubble provides quarterly updates, the majority of the miss was due to the last quarter. Customer acquisition accelerated in FY21 with 9.5 million unique customers, and repeat purchases amounted to 42% of Marketplace revenue, Gross Transaction Value was $701 million and EBITDA was $53 million

Repeat purchases grew by 67%, outpacing first purchase growth of 52%. When combined with transactions per customer rising from 1.1 times to almost 1.2 times, it suggests the platform is becoming established. Indeed, the rising customer base is attracting more suppliers to the platform with artist growth of 54% to 728,000 artists. The network effect is one of the most powerful generators of a valuable and sustainable competitive advantage, which ultimately helps to entrench high returns on equity.

The stock initially fell and then closed higher last Thursday producing a near-40% range on extremely high turnover.

We currently believe RBL will prove to be a high-quality company provided it can convert the long-term prospects for its ‘flywheel’ into its potential economics. While expectations have now been rebased, as have the challenges of ‘comping’ very high past growth rates, the dust still needs to settle on perceptions RBL is purely a lockdown winner.

Beacon Lighting (ASX: BLX)

Beacon reported an excellent result with numbers higher than previously upgraded guidance. Like Accent and other retailers, market expectations are that FY22 year-to-date like-for-like sales are down to mid-teens. Beacon is also cycling very fast prior period growth numbers.

Beacon confirmed it is now targeting the business-to-business/trade channel and aiming for revenue to match retail revenues in three to five years. According to one analyst, in order for trade and retail to each contribute 50% of revenue in five years, trade sales need to grow at a compounded rate of 26%. If the market gives the company the benefit of the doubt, upgrades are likely.

Treasury Wine Estates (ASX: TWE)

Treasury reported improved trading in all markets except China and EMEA. Asia ex-China was particularly strong with EBIT up 51%. COVID-19 continues to impact some higher-margin markets and, of course, China’s tariffs have squashed sales there. NPAT of $310 million was slightly ahead of most analysts’ expectations but revenue and EBITDA were both slight misses.

Revenue came in at $109 million versus a consensus of $112 million and EBITDA was $49.4 million versus a consensus of $51.4 million. Cash flow conversion was notably strong at 107% of NPATA.

Cochlear (ASX: COH)

The overall result was considered slightly weak with revenue and underlying profit slightly missing expectations. By way of example, FY21 underlying profit was two per cent weaker than consensus. The weakness was driven by the Americas and Asia Pacific regions.

One of the few companies to offer FY22 guidance, FY22 Net Profit is for $265-285 million, which compares to consensus estimates of $302 million.

With the stock up 35% year-to-date against the market's gain of 13%, and with a one-year forward PE of 60 times, it is unsurprising the stock is down 7% at the time of writing.

Bapcor (ASX: BAP)

Bapcor is a leading provider of vehicle parts, accessories, equipment, service and solutions. Bapcor’s core business is the automotive aftermarket.

Bapcor reported FY21 NPAT growth of 47% from 20% revenue growth and 39% EBIT growth.

Trade revenue rose 15.5% and Trade EBITDA rose 19%. New Zealand revenue was up nearly nine per cent and NZ EBITDA rose 21.2%. Wholesales was 26.8% higher at the revenue line and EBITDA rose 42.2%. Finally, retail rose 26% and retail EBITDA rose 20%.

As we’ve reported elsewhere, retail margins were lower in the second half with management lowering prices.

Lockdowns will continue to impact the business detrimentally. To understand the impact of lockdowns, Bapcor’s NSW Trade business has copped a 20% hit and NSW retail is off 20 to 30%. An opening up pre-Christmas however could produce a mini-boom. Given present conditions, however, management was understandably cautious. BAP expects FY22 earnings (Pro-forma NPAT) to be “at least” in line with FY21.

Our small caps team really likes Bapcor and believe it is a high-quality business with defensive business characteristics offering growth.

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Roger Montgomery
Chief Investment Officer
Montgomery Investment Management

Roger Montgomery founded Montgomery Investment Management, www.montinvest.com in 2010. Roger brings more than two decades of investment, financial market experience and knowledge. Roger also authored the best-selling investment book, Value.able.

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