The Match Out: ASX hit, all sectors lower as earnings season winds down

James Gerrish

Market Matters

A sea of red for a Monday with the ASX pulling back ~2% following a more hawkish Federal Reserve on Friday night. While indications point to peak inflation having passed, the rhetoric from Jerome Powell strongly implies that we’re not yet at peak rates which is obviously a negative for equities, however when we stand back and look at bond yields which edged higher but not by a lot, the volatility index which settled around 25 (which is low), we’re not seeing any real panic, and a more begrudging pullback seems the likely scenario rather than an aggressive one, that certainly felt like the case today, particularly given US Futures had another leg lower during our time zone.

  • The ASX 200 finished down -138pts/ -1.95% at 6965
  • The defensive Utilities sector was the best relative performer (-0.37%) while Staples (-0.90%) & Industrials (-0.94%) fell less than the market.
  • IT (-4.38%) and Materials (-2.40%) were the weakest links, however, all sector finished in the red
  • Reporting is still going but coming to an end this week, and while there have been plenty of misses (a few solid ones today) overall it’s been fine.
  • NextDC (ASX: NXT) -6.27% reported inline for FY22 but utilization rates were below which is not great for the year ahead.
  • Fortescue Metals (ASX: FMG) -4.93% fell despite an inline result – big earnings – big dividend of $1.21, however, Iron Ore price remains key and the outlook there is more 50/50.
  • Aussie Broadband (ASX: ABB) -15.29% fell on weaker than expected guidance, although after meeting management, the guidance does seem on the conservative side to us.
  • A2 Milk (ASX: a2M) +9.98% enjoyed a rare positive earnings day, with FY22 coming in ahead of expectations, guidance was okay, the worst seems to be over.
  • Mineral Resources (ASX: MIN) -1.74% fell on higher Capex guidance.
  • Lovisa (ASX: LOV) +6.16% delivered a great result, around 8% better than consensus plus talked to a solid FY23 thus far.
  • Adore Beauty (ASX: ABY) -10.6% fell after missing both FY22 revenue and EBITDA numbers plus they pushed our forecasts around margins.
  • Iron Ore was ~2% lower in Asia today
  • Gold was down another $US13 to ~US$1724 at our close.
  • Asian stocks were down Hong Kong off -0.83%, Japan -2.45% while China was flat.
  • US Futures are all lower, around -0.80% for the S&P.

ASX 200 Chart

Reporting Today

Lovisa Holdings (LOV) $19.82

LOV +6.16%: one of only a handful of medium/large cap stocks to trade higher today against the broader market weakness, rallying on a strong FY22 result with positive outlook commentary. The jewellery retailer was 8% ahead of consensus at the revenue line, printing $459m, up 59% on FY22. EBIT was slightly ahead at $142.5m, and profit more than doubled on a comparable basis at $58m, a 10% beat to consensus. One of the key reasons we like Lovisa is its high gross margins which climbed to 78.9%, however, this was partly offset by higher marketing spend. Sales momentum has continued to into FY23, up 21% on last year for the first 7 weeks. It has also opened another 22 new stores in the new financial year to further boost performance.

Aussie Broadband (ABB) $2.66

ABB -15.29%: a difficult start to the week for the telco which copped the double whammy of a weak market and soft outlook. FY22 was solid but well flagged though EBITDA of $39.4m was slightly ahead of guidance at $39m. The $9.6m contribution from the Over The Wire acquisition completed in the year was slightly below expectations, however, this was made up by 62% organic EBITDA growth in Business and +41% from residential. Guidance was where the company disappointed. Revenue is expected to be between $800-840m, in line with the market, but EBITDA margins were guided to 10-10.5%, reflecting a ~5% miss to consensus. There is potential for upside to the guidance if they can extract better than expected cost synergies from Over The Wire and upsell customers with additional solutions. The first 8 weeks of FY23 has seen 15k new connections, tracking nearly 20% below the 4th quarter run rate. Which was also disappointing.

A2 Milk (A2M) $5.40

A2M +9.98%: Produced a solid FY22 results today, launched a NZ$150m buy-back and said that sales would be up high single digits in FY23, with higher margins meaning earnings will increase by more. All in NZ dollars, for FY22 they produced $1.44b in revenue ($1.39b Exp), EBITDA of $196.21m ($184.4m Exp) and profit of $122.62m ($113m Exp). The guidance for high single-digit revenue growth did look light on given consensus was looking for 12% already, however, better margins and a buy-back were enough to allay concerns with that metric. All in all, a beat is a win for A2 and the positive reaction today was warranted.

Mineral Resources (MIN) $63.99

MIN -1.74%: The cheapest Lithium stock around as some call it with the added kicker or Iron Ore production and a crushing business reported FY22 results today that were all solid, however a revision higher for FY23 Capex guidance saw the stock hit early, before recovering late. That seems to be the typical market reaction to MIN results, there’s always something that needs further explanation and when Managing Director Chris Ellison talks, the market takes note.

Next DC (NXT) $10.29

NXT -6.37%: The data centre operator was lower today despite delivering a solid set of FY22 results, although weaker than expected utilization growth was the issue, prompting today’s pullback. For the past year they reported underlying EBITDA of $169m which was up +26% on the year and slightly better than the estimate of $166.1m. Their guidance for FY23 is for EBITDA of $190-$198m versus consensus of $194.3m. All in all, not a bad update, and inline guidance.

Fortescue Metals (FMG) $18.89

FMG -4.93%: a record year of production for the iron ore miner, however, earnings fell with the commodity price and higher costs. Profit came in at $6.2b, down 40% but in line with consensus expectations. Costs were up largely on the back of higher oil prices given the significant energy requirement. Costs in the last quarter were up 9% vs Q3, and guidance of $US18-18.75/wmt suggests further pressure, up 15% at the midpoint vs FY22. Overall it was a solid result, not too far off expectations for FY22 or guidance.

Adore Beauty (ABY) $1.645

ABY -10.60%: the beauty products e-commerce business reported disappointing numbers and a softer outlook, weighing on the stock today. Revenue was a small miss to expectations despite being up +65% for the year, coming in at $199.7m. EBITDA at $5.3m was marginally below the consensus estimate as well, though EBTIDA margins were in line. FY23 expectations will have to be revised lower with the company saying sales are running at -28% on the same period last year in the first 7 weeks. While this number will normalize given it is cycling the boost from COVID lockdowns, the company doesn’t expect to see double-digit growth until the second half. Disappointingly, margins are expected to drop below the 2-4% in FY23, though they provided medium-term guidance of 8-10%for FY27, which highlights the benefit of increasing scale and growing the private label offerings.

Broker Moves

  • Karoon Energy Cut to Underweight at Jarden Securities; PT A$1.95
  • Pacific Smiles Rated New Sector Perform at RBC; PT A$1.80
  • Sonic Healthcare Cut to Sell at Goldman; PT A$31.70
  • OZ Minerals Cut to Neutral at UBS; PT A$26.50
  • Ramsay Health Raised to Add at Morgans Financial Limited
  • Ramsay Health Cut to Hold at Jefferies; PT A$65.40
  • Westgold Cut to Neutral at Macquarie; PT A$1
  • Core Lithium Rated New Outperform at Macquarie; PT A$1.80
  • Global Lithium Resources Rated New Outperform at Macquarie
  • Ramsay Health Raised to Buy at Citi; PT A$85

Major Movers Today

Have a great night

The Market Matters Team

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James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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