The best and worst performers of reporting season

Brad Potter

Tyndall AM

Now we're in the home stretch of reporting season and things are starting to wind down, but that didn't stop the final week from delivering some interesting reports.

Let's take a look at what stood out in Week 4.

There's been a number of stocks this week that have reacted very strongly on the day. Ardent Leisure (ASX:ALG) is one stock that reported a very strong operating result from their US main event operations and was up over 20% on the day. 

Their main centre performance has exceeded pre COVID levels since March. And all of their 44 centres are now trading as the US is opening up out of lockdowns. So cashflows per centre are up strongly illustrating the pent-up demand from society to socialize and spend once out of lockdowns.

Iluka (ASX:ILU) reported a 61% increase in sales revenue that the half-year to June with net profits after tax up 14% as many geographies rebound to pre-baked pandemic levels of production.

The Iluka result was largely in line at the EBITDA level, but did it exhibit very strong cash flow generation over the half, and they're sitting on a very strong cash balance on the day. 

However, the announcement by Rio of the restarting of the Richard's Bay operation in South Africa weighed on the share price. 

Since then the stock has rallied given the positive news around strong demand for both zircon and rutile and the expected price rises. Iluka is now set to become a meaningful Rare Earths producer and may build a refinery in WA. So overall Iluka is well-positioned with attractive growth projects in their existing mineral sand sector, as well as this rerest opportunity.

The retail sector has seen strong performance over the half, including Wesfarmers: Is this sustainable?

Wesfarmers (ASX:WES) are one of the beneficiaries of the COVID lockdown and reported a very strong result, which was 3% ahead of consensus. 

Revenue year-on-year was up 10% in virtually all their retail divisions. Bunnings, Kmart, Catch, Office Works, all had strong EBIT results as one would expect. And as a result, they've announced a $2.3 billion capital return.

Our expectation is that it's going to be tough for the company to continue this growth in a reopening phase. However, the balance sheet remains pristine and they're returning over $2 billion to shareholders via capital return. 

And the dividend continues to remain strong. So overall, a very strong result from Wesfarmers, however largely priced into the stock.

What were some of the best or worst performing sectors this earnings season?

Outside of stock-specific performance due to the result or outlook, two themes seem to have impacted the month and therefore share price moves. 

The fall of the iron ore price from the lofty highs of over $200, to now sitting around $150 has really weighed on the miners despite very solid results, strong cash flows, as well as large dividend returns to shareholders. 

The other thematic that has emerged is this COVID reopening trade in Australia during the month. 

We've started to see stocks leveraged to the reopening strongly outperform, such as Qantas (ASX:QAN), Flight Centre (ASX: FLT) and Star Casino (ASX:SGR) despite the results being weak as one would expect. 

Whereas stocks that have done very well during the lockdowns have started to underperform. So with vaccine rates moving quickly to the 70, 80% range, the government needs to reopen, we expect this may continue.

What themes did you see emerge this profit season?

Capital management, including increasing dividends and M&A remained strong thematics through reporting season, as we expected. We consider these themes will remain as Australia emerges from the COVID lockdowns. Balance sheets largely remained pristine and therefore non-core sales and excess cash flows are being returned to shareholders. 

Given the low cost of debt and amount of cash sitting on the sidelines, M&A remains a key thematic going forward. And our expectation is that several of our stocks in the portfolio are likely to be involved in M&A activity.

Dividends have rebounded strongly post COVID and our expectation is that payout ratios and dividends will remain strong over the next six to 12 months. 

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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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