The Match Out: ASX rallies strongly from morning lows, A2M and AGL are two dogs coming back to life!

James Gerrish

Market Matters

It was a weak start to trade this morning, with the overhang of the weekend news flow (remarkably bearish on most fronts) pushing the ASX 200 down around 70points at the lows before more encouraging news around Russia and Ukraine prompted a strong rally. The ASX eventually closed a touch higher with the Utilities (+3.71%) and the Consumer Staples (+2.34%) the standouts while IT (-2.74%) was the laggard again – a decent turnaround in the end.

  • The ASX 200 finished up +11pts/+0.16% at 7233.
  • The Utility sector was strong underpinned by the takeover tilt for AGL Energy (AGL) +10%, a stock we own in our Income Portfolio – more on that below.
  • A2 Milk (ASX: A2M) +11.13% was also well bid after its 1H22 results had no ‘land mines’ embedded in it!
  • Oz Minerals (ASX: OZL) -0.43% reported CY21 results that were broadly inline, although profit was slightly weak.
  • Bluescope Steel (ASX: BSL) -1.31% a touch lower despite a record 1H22 result.
  • Altium (ASX: ALU) -5.92% fell after upgrading revenue but downgraded margins – the market is focused on margins in tech land currently.
  • Super Retail (ASX: SUL) -9.49% showed why a cautious stance around retail has been prudent with the company talking down January sales – this is now a stock on our radar.
  • Zip Co (ASX: Z1P) -7.78% and Tyro Payments (ASX: TYR) -25.92% both had very tough days on weak updates. The payments space from the big guys like PayPal right down to the small guys after doing it tough.
  • Endeavour Group (ASX: EDV) +10.29% rallied on a very strong 1H update, profit +16% on year on year, which was a big beat.
  • PointsBet (ASX: PBH) -11.11% fell after a US competitor DraftKings had weaker user growth than expected.
  • Iron Ore was up in Asia today, after falling ~20% from recent highs it bounced +1.5% to kick off the week.
  • Gold was down US$5.84 at $US1892 at our close.
  • Asian stocks were lower Hong Kong -1.07%, Japan -0.70%% while China was off -0.35%
  • US Futures are up around 0.60% although no trade in the US tonight for Presidents Day.
ASX 200

Altium (ASX: ALU) $32.44

ALU -5.92%: A weak session today for Altium despite upgrading their revenue guidance for FY22 with the stock down around 10% at the worst before recovering to close down a more modest 6%. The issue came around margins which has been a common theme for tech stocks this reporting period. 1H22 revenue came in at $102.2 million in line with expectations while FY22 revenue guidance has been tightened to the top end of the prior range (now US$213-217 million) suggesting the business has decent momentum. However, FY22 underlying EBITDA margin is expected to fall at the lower end of the unchanged 34-36% range due to costs associated with enterprise sales hiring. While this will likely result in slight earnings downgrades, given the context of the opportunity for ALU, we think the increased investment in additional headcount makes sense.

Altium

AGL Energy (ASX: AGL) $7.92

AGL +10.61% Rallied strongly today following a takeover tilt from a Brookfield / Mike Cannon-Brookes consortium that proposed buying AGL for $7.50, a minuscule premium of around 5% to the last close and completely unrealistic for a change of control transaction, however, we do support their rationale for winding up the coal-powered generation and using AGL’s footprint to expedite the transition to renewables. We think there will be more to play out with this.

AGL Energy

A2 Milk (ASX: A2M) $5.89

A2M +11.13%: It’s been a tough few years for A2M and more often than not, results day has been met with a large sell-off as they miss the mark; today was different. The 1H22 scorecard released this morning was void of nasty surprises and confirms the new management team now have a handle on the business. While the headlines are weak with profit down 53%, they were in line with expectations and as management said in the announcement, the company is now in a strong position to execute its strategy and deliver revenue growth in FY22, backed by nearly $700 million of cash on the balance sheet. This has been a tough position for our Flagship Growth Portfolio having bought too early at $8.18, however, we now see today's result as a turning point.

A2 Milk

Aussie Broadband (ASX: ABB) $4.84

ABB +7.56%: the emerging telco was out with its first-half results today, though it was largely pre-announced. The company is tracking well and maintained FY22 EBITDA guidance of $27-30 million. NBN market share climbed to 5.7% continuing above-market growth. Talks with Over The Wire (OTW) continue, looking to wrap up the deal next month. The acquisition is expected to be hugely accretive for Aussie Broadband earnings, potentially lifting the combined EBITDA over $100 million by FY23 with significant synergies and cross-sell opportunities.

Aussie Broadband

Oz Minerals (ASX: OZL) $26.03

OZL -0.46%: FY21 results out for the Copper company today with sales in line with expectations, however profit was a slight miss (NPAT$531m vs $567m expected). The dividend of 34cps was ahead of the 32cps expected while management maintained guidance for the year ahead. We remain long OZL in our Flagship Growth Portfolio.

Oz Minerals

Tyro Payments (TYR) $1.615

TYR -25.92%: a very weak first half result today saw significant pressure put on shares in the payments solutions business today. Tyro saw transaction volume and revenue jump around 30% each, but EBITDA fell 67% to $2.8m on higher costs. There was a significant jump in merchant numbers but transactions were weighed on by extended lockdowns in NSW and Victoria. Costs were also up, the company noting wage inflation, higher investment costs associated with their Telstra partnership and recent Medipass acquisition and extending assistance to merchants including deferring fee increases. The result was a decent miss to expectations and they are now well behind the 8-ball in terms of meeting full-year expectations. There was an obvious (large) seller of the stock in the market today.

Tyro Payments

Zip Co (ASX: Z1P) $2.37

Z1P –7.78%: released a (surprise) interim half-year update today ahead of the full report later this week. While customer numbers (9.9m) and revenue ($302.2) were records, so too was the cash EBITDA loss of $108.1 million, well above the around $40m expected by the market. The bigger than expected loss was a result of heavy investment in international markets, and while it’s generating growth, the increased costs are a major concern and it seems to us that they’ll need to raise capital if the trend continues at such a pace. Management said they’re looking to reduce costs and allocate capital towards more profitable markets in an effort to reduce the burn in the second half, however, we need more detail on this. After pushing aggressively for growth, this change of tune suggests the path to create value in the business has changed and with some significant drawdowns in the cash balance in the half, the company may be backed into another capital raising corner. On top of that, it is continuing to do due diligence on Sezzle (ASX: SZL). While a tie-up would bring scale, it would also need some capital upfront to extract synergies. We will get more detail on the path ahead come Thursday.

Z1P Co

Broker moves

  • Magellan Financial Cut to Underperform at Macquarie; PT A$19.25

  • Magellan Financial Cut to Underweight at JPMorgan; PT A$20

  • Wesfarmers Raised to Neutral at Citi; PT A$50

  • Orora Raised to Buy at Citi; PT A$4.07

  • HUB24 Resumed Buy at Citi; PT A$32.70

  • SmartGroup Cut to Hold at Morgans Financial Limited; PT A$8.78

Major movers today

Enjoy your 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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