Two buys and a sell heading into reporting season

Maqro Capital's number crunchers have come up with three trades for February's crunch period.
Mark Gardner

Maqro Capital

The upcoming reporting season is generally expected to see the majority of companies report growth in key metrics when compared to the previous corresponding reporting season. More than three-quarters of companies are expected to see December half-year revenue growth, and close to 60% of companies report earnings growth.

But this alone doesn’t help assess which companies are attractive (and unattractive) heading into reporting season.

In this wire, we’ll share with you two companies that we expect to surprise to the upside, from sectors that we believe will outperform during reporting season. We also share our thoughts on a high-potential company that usually fails to deliver during reporting season - a threat that is heightened given its position in the sector which we fear will perform the worst.

Dalrymple Bay Infrastructure (ASX: DBI)

Boring isn’t always bad. While companies that have the potential to report eye-catching earnings will always capture the attention of investors, we view the addition of a few stable and high-quality names as essential ahead of reporting season. This reduces the risk of one bad report scuppering the company's share price.

For this strategy, we put forward Dalrymple Bay Infrastructure which primarily manages a coal export terminal in Queensland. The company’s business model revolves around generating fees to put coal production on ships and set the coal on its way to its destination. This model is relatively simple.

With coal exports remaining strong, and the fees unaffected by changes in coal prices, we view this as an excellent way to gain exposure to the coal market. It has the added advantage of being largely insulated from the high levels of volatility in the space currently.

Dalrymple has a 7.3% trailing 12-month dividend yield, and we expect this to increase further into 2023, especially given China’s change of heart on their ban of Australian coal imports. 

Dalrymple Bay's recent share price

Sandfire Resources (ASX: SFR)

Since BHP (ASX: BHP) entered into a scheme implementation deed to acquire 100% of OZ Minerals (ASX: OZL), Sandfire has been left as the sole large-cap copper miner on the Australian market. While Sandfire has often been seen as the inferior option to OZ Minerals in previous years, we believe it is well-positioned to step out of the shadow.

The December quarter was slightly disappointing from a copper production point of view, but we see a reduction of C1 unit costs (C1 refers to the direct production costs of iron are) as a positive. And given the strong copper price dynamics, we see strong potential for the company to exceed revenue expectations. With the Chinese construction season due to start in early March, our expectation is that the company will guide for a stronger second half, acting as a catalyst for the company.

Given that copper demand is set to continue its strong growth as the world increasingly moves to copper-intensive clean energy projects, we like Sandfire’s profile especially with the company’s operations maturing. 

Sandfire's recent share price

Polynovo (ASX: PNV)

Polynovo is an Australian-based company focused on the development of medical devices based on its patented technology. Its cornerstone product, NovoSorb BTM, is used to treat wounds and aid the body in regenerating tissue.

Over the past six reporting periods, the company has tended to disappoint investors with the company disappointing on 83% of their recent annual and half-yearly reports, falling by an average of 10.2%. This has come as investors tend to get ahead of themselves with Polynovo, where they expect great things from their medical-grade polymer technology, but the company tends to not live up to these expectations.

Given the high expectations even slight misses on analyst expectations have an exaggerated impact and this typically sees Polynovo exit reporting season weaker than where it started. The set-up for the company currently is similar to that of six months ago. Since then, it has risen rapidly on little fundamental news, which essentially represents bets that the company will beat expectations. 

Polynovo's share price performance heading into its FY22 report compared to its 1H23 report

While we like Polynovo from a fundamental point of view and think that it is an interesting company in an exciting space, we believe it would be prudent to reduce allocations of the company going into the reporting season due to the company’s track record of disappointing investors’ expectations. Indeed, if the company does miss expectations, that would then represent discounted price to a company which has strong long term potential. 

This article was written by Maqro Capital's Head of Research Julius Zondag and equity research analyst Claire Rich.

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Mark Gardner
Head of Trading, Senior Advisor
Maqro Capital

Mark is the Head of Trading with Maqro Wealth bringing more than 25 years of experience in fixed-income and equities trading. He is focused on portfolio management for SMSF and Family Office clients, Mark oversees Maqro's portfolio positioning and...

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