The Second Half Club

Lachlan Davis

IFM Investors

As we close the 2019 financial year, we take a look at companies that may disappoint at the upcoming company reporting season in August.  A good place to start is to look at companies that have guided to a stronger second half to meet their full year guidance.  In some cases it is perfectly reasonable to have a skew to the second half.  Timing of M&A synergies, new contracts or product releases, store openings and higher sales periods (such as Christmas) are all valid reasons why one period of the year may have greater revenues or profits than another.

However, history suggests that many companies who require a stronger second half to make their guidance are overly optimistic and fall short.  Already ahead of the current reporting season we have seen confessions from Reliance Worldwide, Link Administration, Costa Group, Star Entertainment, BWX, Regis Healthcare, Estia Healthcare & Huon Aquaculture just to name a few.

Two stocks that we believe could disappoint in the upcoming reporting season, given their significant second half skew in earnings, are Virtus Health and Blackmores.

Virtus Health (VRT)

Virtus Health provides reproductive and fertility health services. Consensus estimates for Virtus have pulled back in recent months, but the market is still factoring in an underlying improvement in the second half to hit market expectations. We believe this could be challenging given weaker consumer confidence and falling house prices in Australia. Since listing, IVF cycles growth have proven to be more cyclical than expected and purchase decisions are impacted by consumer confidence and wealth effects given the significant cost of the treatment.

Given we have recent ample evidence of a weaker consumer, as highlighted by downgrades across a variety of retail exposed stocks in Adairs, BWX, Automotive Holdings, Metcash and Stockland, this suggests to us that Virtus may struggle to meet consensus estimates at the revenue line.  If the company does manage to hit their sales targets, this is then likely to have been achieved through lower pricing, and we expect margins to additionally come under pressure as competition heats up from low-cost operators in the IVF sector making it harder to meet the market's profit expectations.

Blackmores (BKL)

Blackmores is a well known brand in the Australian market manufacturing and selling vitamins and has been particularly successful in the Chinese market.  Blackmores reported a poor result in the February results season with revenues and profits coming in well below market expectations. This weakness continued into the third quarter 2019 trading update showing sales hadn’t improved despite a step-up in marketing spend.

A rebound is required in the final quarter of the financial year to hit consensus estimates. However, we think this may be overly challenging in the current environment for a number of reasons.

In its most recent update, Blackmores noted it will conduct a review of its business in China, particularly relating to Daigou sales. There is still uncertainty around top line growth given the changes to E-commerce laws in China. The company has also stated that is focusing on channel management, pricing and inventory and this suggests to us that margins may continue to reduce.  Additionally, the departure of the CEO in May 2019 increases the risk of the company executing on its business improvement plan.  Putting all these together, we believe there is a risk that previous trends continue and the expected rebound does not eventuate.


IFM Investors Pty Ltd, ABN 67 107 247 727, AFS Licence No. 284404, CRD No. 162754

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial advice. IFM Investors Pty Ltd may be long or short in its own right, and in the funds it manages on behalf of clients, in the securities mentioned in this article.

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Lachlan Davis
Lachlan Davis
Head of Large Cap Active Equities
IFM Investors

Lachlan leads IFM Investors’ Large Cap Active Equities Team and has more than 20 years of experience in managing equity portfolios.

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