CORE PORTFOLIO CHANGES, EARNINGS UPDATES & TAKEOVER TALK
Domestic reporting season has continued to ramp up this week with ~25% of companies in the ASX 200 scheduled to release interim financial year results in February having now done so.
Overall, we’ve viewed the results for companies within the Core Australian Equity Portfolio, and broader market for that matter, as being largely positive and ahead of market expectations. While reporting seasons don’t typically lead to significant changes in our long-term fundamental views, it does allow us the opportunity to catch up with management teams to review financial performances and near-term outlook.
As a result of some changes in the level of our conviction and movements in valuations, we’ve made several adjustments to existing positions within the Core Australian Equity Portfolio.
ADDITIONS/INCREASES
Having underperformed relative to peers and the broader ASX 200 since we reduced our position back in November last year, BHP Group (BHP) appears more attractive, and we have increased our exposure. Despite ongoing uncertainty surrounding Chinese growth and global demand for resources, we continue to believe that BHP is best placed as a diversified miner to be able to deliver into the long-term demand for future facing commodities.
CSL Ltd’s (CSL) interim FY24 result was mixed with the very strong +20% NPAT growth and margin recovery in the blood plasma business, Behring, being partially offset by lower-than-expected growth rates in vaccine operations, Seqirus, and challenges in the recently acquired Vifor. Despite this, we remain confident in management’s ability to continue to deliver strong double-digit earnings growth over multiple years as highlighted by the reaffirmed FY24 guidance for 13-17% profit growth and as a result we saw the recent share price weakness post the result as an opportunity to increase our position.
Finally, we’ve increased our position in Mineral Resources (MIN) following the recent sell-off on the back of lower lithium prices. Several factors continue to weigh heavily on lithium spot prices including slower than expected EV sales growth, particularly in China, destocking of lithium supplies by battery manufacturers and a sharp increase in lithium supply which is expected to outstrip near-term demand. However, with spot prices now well into the cost curve we are starting to see some supply responses which could see this oversupply disappear rapidly and support some stabilisation for lithium in the medium to longer-term. Additionally, while MIN’s earnings are increasingly dominated by lithium, the company offers diversified exposure to steady revenue streams from its long-term contracting business together with iron ore operations where spot prices have remained elevated at >$100/t for over 6 months now.
EXITS/REDUCTIONS
To help fund the above increases, we’ve chosen to take some profits from the recent rally delivered by Macquarie Group (MQG). MQG remains the largest active position in the portfolio, and while the recent 3Q24 trading update highlighted ongoing challenges as M&A activity is at its lowest level in 10 years which is delaying large scale asset realisations. We see this as delaying strong profit growth, not removing it and we therefore maintain our positive long-term view.
Additionally, we have taken some profits from Qube Holdings (QUB), but similarly the company remains one of our largest active positions in the portfolio as we continue to view their diversified earnings base delivering logistic services across various sectors as favourable.
Transurban’s (TCL) interim FY24 result was slightly softer-than-expected with traffic volume growth of 2.1% coning in below market forecasts. As a result, we have reduced our position and see few near-term positive catalysts. However, the balanced mix of growth through road expansion projects and solid distribution income due to high levels of cash flow remains attractive long-term.
EARNINGS UPDATES FOR KEY CORE PORTFOLIO STOCKS
James Hardie’s (JHX) strong 3Q24 result increased our overall level of conviction with activity levels continuing to pick up in the US housing market while JHX appears to be managing their sales pipeline, operational efficiencies, and margins extremely well.
Commonwealth Bank (CBA) delivered an uninspiring 1H24 result in our view with flat revenues, higher expenses, lower loan impairments and further net interest margin compression being the key takeaways. We maintain our negative view on the big four banks and underweight position in the portfolio but do continue to view CBA as the higher quality play within the sector due to its superior return on equity and balance sheet profiles.
In typical Goodman Group (GMG) fashion, the 1H24 result reported was extremely strong with earnings beating market expectations by ~2% but more importantly FY24 operating earnings growth guidance was upgraded from +9% to +11%. We see upside risk to the +11% guidance with management coming across as being extremely conservative on the call in our view and expectations for ongoing strength in demand for data centres which now represents 37% of GMG’s $12.9b of work in progress.
Wesfarmers (WES) enjoyed an extremely strong period, reporting net profits 5% ahead of market expectations thanks largely to improved margins across the Kmart group while Bunnings continued to deliver stable revenue and earnings growth in the face of consumer pressures.
TAKEOVER
Altium (ALU) announced that it has entered into a binding scheme implementation agreement for Tokyo-based supplier of advanced semiconductor solutions Renesas Electronics Corporation for a consideration of $68.50 per share in cash. This price represents a premium of ~39% to ALU’s 1-month volume weighted average price and more than 100% upside to when we first purchased the company in the Core portfolio back in 2019. As one of the portfolios largest active positions it’s a bitter-sweet moment potentially losing a company that we have such high conviction in, however the on first cast we believe the offer price is more than fair and reasonable.
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