The Month Ahead - September 2023

The August Reporting Season has come to an end, and it's brought with it a wide spectrum of earnings performance from companies listed on the ASX, showcasing a significant variance in results. 

As we look towards the Month Ahead for September, we reflect on the outcomes of reporting season and consider the implications for the months to come. We have selected three sectors that we believe deserve your attention, given the post-reporting season results and the potential opportunities they may offer.

Have a great month.

Reporting Season Wrap

In our review of the August 23 reporting season, we suggest that the concern over an earnings recession has proven premature as corporates again survive another test navigating slower growth and higher interest rates. We think investors can take comfort from an overall resilient earnings outlook, and that the conservatism which has been built into market expectations since the pandemic appears to remain in place, providing a margin of safety. 

Retail Sector Wrap

We were positively surprised by the resilience of the earnings of discretionary retailers in FY23. On average, the companies we follow grew sales by 9%, outstripping the rate of inflation, with pre-tax earnings growing by an average of 19%. The fastest growth was reported by Lovisa, Accent and Universal Store, while Baby Bunting and Domino’s Pizza Enterprises reported operating earnings more than 20% below the prior year.  Consumer demand has clearly softened, but the decline has not been precipitous and there are reasons to expect growth to resume in the months ahead. Gross margins look likely to be stable in FY24, supported by lower freight and supplier costs, although operating profit margins will likely moderate as retailers absorb significant wage inflation. Our key picks coming into FY24 are Lovisa, Accent and Beacon Lighting. These are businesses with strong brand equity and the ability to grow sales in a subdued consumer environment and to find cost efficiencies.

Travel Sector Wrap

Reporting season held few surprises given all the travel stocks either upgraded or provided trading updates in the weeks leading up to this event. For us, Helloworld Travel (HLO) had the strongest year. After three profit upgrades, HLO’s FY23 result came in at the top end of guidance. All companies continued to recover strongly from COVID. It was evident that the companies didn’t waste the COVID induced travel downturn and are coming out of it with structurally higher margins. Many have also made highly accretive acquisitions. The Leisure travel recovery continued to lead Corporate travel. Following three years of travelling at home, the demand for international travel is very strong, despite the high airfares. HLO said there has never been a better time to be a travel agent. Given all the companies are generating strong cashflow, pleasingly, they have all returned to rewarding shareholders with a final dividend. Outlook commentary was upbeat with consumer’s prioritising travel over other discretionary categories. It was noted that leisure travel has emerged as a non-discretionary item in the household budget. We believe that the AGM season over October/November will be the next catalyst for the sector given the companies will all provide trading updates and reiterate or issue FY24 earnings guidance. While we have all stocks on a BUY recommendation given positive industry fundamentals and their attractive valuations, our key pick of the sector is HLO.

Industrials Sector Wrap

On net, the FY23 results season was positively received by investors, with many stocks bouncing off the share price lows which followed the guidance downgrades of May/Jun-23. The highlight was GMG (BUY), with the share price up 13% (week post result), as the company beat FY23 guidance (EPS growth of +16% vs +15% guidance), issuing FY23 guidance (EPS growth of +9%), along with management’s discussion of the potential for their data centre business – which now comprises 1/3 of their $13Bn of work in progress. In light of the recent shift in interest rates, investors were rightly focused on balance sheet health – MGH being a great example, where the stock responded positively as gearing came in below expectations and management outlined a plan for further capital recycling. Housing markets, and in turn the building material companies, remain circumspect about a quick turnaround in demand, albeit management across the board see the medium term opportunity from latent demand driven by underbuilding during Covid, increased immigration and record low rental vacancies. Top picks from this diverse group of industrial companies which spans building materials, real estate, maintenance services and labour hire are Ventia (VNT), Qualitas (QAL) and MAAS Group (MGH). 

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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