The Match Out: ASX struggles above 7500 (again), Supermarkets rally, Megaport (MP1) tanks

James Gerrish

Market Matters

The market was supported early on however a flow of negative company updates (generally at the smaller end) and a softer-than-expected Retail Sales print at 11.30am had the sellers re-loading and the ASX 200 fell back below 7500 for its 4th straight session. The defensive sectors were the place to be, the supermarkets rallied on a broker upgrade while the tech sector struggled after another lacklustre update from Megaport (MP1).

  • The ASX 200 finished down -4pts/ -0.07% at 7476
  • The Consumer Staples sector was best on ground (+2.33%) while Healthcare (+1.43%) & Consumer Discretionary (+0.16%) were also positive.
  • IT (-1.34%) and Real-Estate (-1.08%) the weakest links.
  • Forth session in a row where the ASX 200 has traded above 7500 only to close below – clearly resistance here and we are not chasing strength at current levels.
  • Retail Sales for December were weak today printing -3.9% MoM versus a decline of -0.2% expected
  • The Staples were well bid on a broker upgrade – Woolies (ASX: WOW) +3.77% and Coles (ASX: COL) +2.36% both upgraded by Credit Suisse to buy equivalents.
  • IGO (IGO) -7.08% fell after delivering 1H23 results that missed expectations – lower realised pricing met higher costs = lower profit.
  • Megaport (ASX: MP1) -24.74% tanked after missing growth numbers (again) while they are now showing signs of balance sheet stress. Not good.
  • PointsBet Holdings (ASX: PBH) -17.40% down as quarterly costs increased while growth slowed.
  • Flight Centre (ASX: FLT) in a trading halt raising capital to fund a $220m acquisition.
  • Dubber (ASX: DUB) -11.24% is still burning too much cash as shown through their quarterly today. While winning new customers is positive, they are not managing the cost base aggressively enough.
  • Bubs Australia (ASX: BUB) -11.27% knocked as Q2 revenue was hurt by COVID lockdowns in China.
  • Commonwealth Bank (ASX: CBA) +0.27% hit a new all-time high today at $110.45 – this is now very rich and while we still own, we’re certainly not buyers at such levels.
  • Iron Ore was down a touch in Asia today, circa ~0.60%, still above US$120/tonne
  • Gold was down overnight and that theme continued today – sitting US$1920/oz at our close.
  • Asian stocks were lower, Hong Kong down -1.28%, Japan -0.04% while China was off -0.50%
  • US Futures are all up, around +0.40%  

Megaport (ASX: MP1) $5.78

MP1 -24.74%: the cloud connectivity business struggled today after announcing weak 2Q connection numbers with the market concerned about the company’s balance sheet. Monthly Recurring Revenue (MRR) climbed 6% to $12.4m, and revenue was 10% higher than the 1st quarter while the company is profitable at the EBITDA line. However, they added just 762 new services in the period, ~50% below expectations, while ports grew by just 203 to 9,809. The cash balance also fell by $12m to $57.5m. As a result of the tight cash balance, Megaport has secured a $25m revolving credit facility to support the balance sheet, however, this is an expensive short-term solution that may squeeze them further if the company doesn’t meet EBITDA embedded hurdles.

Flight Centre (ASX: FLT) $15.83

FLT Trading Halt: Raising $180m in fresh equity today at $14.60 to buy UK-based luxury tour operator Scott Dunn for $220m as they push further into the luxury market, this time focussing on a younger demographic with Scott Dunn’s customer base primarily in the 35-45 year age bracket. This is also a play on affluence with the average spend per booking of $39k meaning less price-conscious consumers which should in theory help FLT margins. While promoting the acquisition, they also increased earnings guidance, with 1H underlying earnings tipped to be $95m which is above prior guidance of $70-90m. A good update from FLT, strong trends in travel clearly helping their business however, the significant increase in shares on issue during COVID continues to hurt the recovery in share price.

IGO Limited (ASX: IGO) $14.57

IGO -7.08%: Hit hard today following 1H23 results that missed the mark, mainly around lower realised pricing and higher costs – not a great combination. Underlying profit for the half of $591m was shy of the $677m expected while the dividend of 14cps was largely inline. Downstream cost pressures are to blame which we think will be a common theme through this upcoming reporting period for the miners, while in the case of IGO, they were also hurt in the March quarter by lower price realisation versus expectations. With some delays around their production ramp-up being amplified by costs, this is not a great update from IGO and the decline in price is understandable. We own IGO with a small ~3% weighting in the Flagship Growth Portfolio, having trimmed the position late last year. We are keen to increase our weighting again should it trade nearer $13.

Bubs Australia (ASX: BUB) 31.5c

BUB -11.27%: weaker China sales weighed on Bubs shares today, just a week after the stock rallied on the potential upside in China sales. Gross revenue in the quarter was down 28% on last year, weighed by a 66% slump in China sales, though international revenue climbed thanks to the emergency supply agreement signed with the US in the middle of 2022. The weak quarter saw 1H revenue fall 1% on pcp, however, the company was talking up their fortunes for the rest of the year. China sales are expected to rebound as the country opens up again, while Bubs is hopeful of a permanent agreement with the FDA in the US to continue to supply formula into that market.

Broker Moves

  • Challenger Cut to Underweight at JPMorgan; PT A$7
  • Woolworths Group Raised to Outperform at Credit Suisse
  • Coles Group Raised to Outperform at Credit Suisse; PT A$19.31
  • Lynas Cut to Underweight at JPMorgan; PT A$8.60
  • Link Administration Cut to Neutral at JPMorgan; PT A$2
  • GNX AU Raised to Speculative Buy at Morgans Financial Limited

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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