Reporting season for first half results was highly anticipated due to the dynamic circumstances impacting markets, including inflation and higher interest rates – what did the Prime Value Asset Management equities team make of the latest results?
ST Wong, Chief Investment Officer & Portfolio Manager
Biggest surprise: Qube (QUB) Holdings reported a 37% rise for its 1H23 Adjusted Net Profit after tax, which was over 20% above the market’s expectations. Qube posted strong revenue growth over the half despite operating challenges in costs and logistic disruptions. The market has consistently underestimated Qube’s diverse earnings base and strong market position. Stock responded well following a strong run up in the share price.
Biggest disappointment: Markets punished Omni Bridgeway’s (OBL) larger than forecast loss in 1H23 due to a lower-than-normal conversion rate (4% versus 15% expected over the long term) and higher operating costs. Markets also reacted to the departure of CEO Andrew Saker, and stock fell heavily. However, the company is on the cusp of earning substantial profits over the next few years.
Biggest takeaways: The squeeze on consumer spending is happening slower than expected but will be more evident later in the year. In the meantime, the consumer is shifting its choices on where it chooses to spend its disposable income—moving from hard goods to services, entertainment and hospitality.
Mike Younger, Portfolio Manager
Biggest surprise: Lindsay Australia (LAU). While the company delivered on expectations of another strong profit result, the news that one of its largest competitors has been put into voluntary administration, at a time in which industry conditions appear rosy, was a big surprise.
Biggest disappointment: Omni Bridgeway (OBL). The stock was marked down significantly by investors on what we believe are misplaced concerns over its balance sheet. We note OBL currently has available liquidity of around $190m, while it’s oldest fund is now ripe to start returning capital and excess profits to the company.
Biggest takeaways: Revenues broadly beat market expectations, but higher costs meant that the proportion of companies missing earnings expectations was higher than is typically the case. While revenue growth may slow as the economy softens, cost growth should similarly slow as some input costs, such as logistics and commodity prices, have already commenced normalising, and wage pressures should start to ease.
Richard Ivers, Portfolio Manager
An important point to note is that reporting season is fundamentally backward looking. The economy was better in the first half of the financial year, which was reflected in results. But conditions have softened with sectors including retail goods and media advertising showing signs of weakness. This isn’t all bad news. It shows the interest rate rises are working, and that a pause in rate rises is coming into focus.
It’s always worth remembering that equity markets lead the economy – we saw this when equities markets started falling last year, well before the economy softened. The opportunity for us as investors at this point in the cycle is to focus on quality assets, which aren’t too cyclical in nature. We also have one eye focused on preparing for the rebound when it comes.
Benjamin Mellody, Equities Analyst
Biggest surprise: Businesses such as Domain Holdings Group (DHG) and PEXA Group (PXA), which are closely linked to the Australian property market, struggled in the first half of FY23 due to lower listings and transaction volumes. Although this was understandable to a degree, considering the rapid increase in interest rates over 2022, the extent to which the market has sold off these high quality businesses with dominant positions in their relative markets was a surprise.
Biggest disappointment: Austal (ASB), a naval shipbuilder that contracts with both the US Navy and Royal Australian Navy, delivered a solid operational result for the half, however due to a large accounting provision for potential unrecoverable costs, its financial results were much lower than forecast at the start of the period.
Biggest takeaways for investors: There were very few companies that felt comfortable enough with their short term outlook to give earnings guidance for the rest of the June 2023 financial year, which illustrates the elevated level of uncertainty within markets at the moment. Investors are likely to want to see more visibility around when interest rate rises have peaked and economic activity has bottomed before the share market begins its inevitable recovery.
The Prime Value Emerging Opportunities Fund performed well in February, returning +0.2%, which was 3.9% above the Small Ordinaries Accumulation Index of -3.7%. This strong relative performance against the index in February (+3.9%) followed relative underperformance in January. Returns were positive in both months. This financial year the fund has returned +7.2% and been positive in six of eight months despite fears of inflation and rising interest rates.
The Prime Value Opportunities Fund fell by 1.3% in February, yet has delivered +11.0% for the FY23 year-to-date (comprising eight months performance). The Fund is an all-caps fund with a flexible investment approach, investing in companies of all sizes, large to small. The portfolio manager focusses on companies led by strong management teams, with good compounding growth prospects.
To invest in the Prime Value Emerging Opportunities Fund and the Prime Value Opportunities Fund, please contact our Client Services Team at info@primevalue.com.au and 61 3 9098 8088