This article was first published for Livewire Markets on Thursday 9 March.
February reporting season did not bring about much optimism, with aggregate profits among ASX 200 companies falling 30% year-on-year, expenses growing faster than revenues and only 53% of companies increased its dividend, according to Commsec. Amid the wall of worries, which stocks and sectors can withstand the raft of negative factors?
In this article, I’ll take you through UBS’ reporting season themes, top picks and the ‘buckets’ they fall under.
Low quality results: Several companies reported lower cash flow vs. EBITDA and net profit alongside rising inventories and receivables. However, management generally viewed this as a temporary issue related to timing.
Wage inflation: Costs are intensifying despite an improvement in labour availability.
Weakening demand: Discretionary retailers observed a pause in demand for items classified as “high-priced wants” while consumer staples experienced some ‘trade down behaviour’ to lower priced items.
Capex risks: Large capex projects are being pushed back due to sharp cost inflation and interest rate rises.
Across UBS’ Emerging Companies coverage, its key picks include ten stocks that fall into four distinct buckets.
These are stocks that aren’t overly expensive and have earnings exposure to “highly defensive end markets providing good near-term earnings visibility”. These include:
These are companies that have exposure to “favourable industry conditions and earnings exposures that are largely unaffected by broader macroeconomic headwinds”. Evidently, there’s a strong focus on companies engaged in agriculture:
The latest earnings commentary from both companies highlight their resilience against the uncertain macroeconomic backdrop. “Favourable seasonal conditions and attractive soft commodity prices generated strong demand for our seeds and crop protection products… conditions remain favourable as we enter into the FY23 financial year and we are on track to meet or exceed our FY26 revenue aspirations.” – Nufarm CEO Greg Hunt
“Future demand for Ridley’s products is positive with Australian farm gate output forecast to continue increasing.” – Ridley Corp CEO Quinton Hildebrand
The near-term might be bumpy for these companies but they offer “attractive multi-year growth” opportunities via new product launches and international expansion. These include:
Breville Group (ASX: BRG): 1H23 results flagged weaker-than-expected growth in the EMEA region but the company has a growth runway via underpenetrated overseas markets.
IDP Education (ASX: IEL): 1H23 results were also softer-than-expected due to overhead costs but student placement leading indicators suggest the longer-term outlook is intact.
NextDC (ASX: NXT): 1H23 results flagged some short term pain due to high energy prices and softer-than-expected contracted utilisation. However, work is underway for an additional 4.5MW to meet customer demand.
Travel stocks have emerged from Covid as leaner organisations with a lower cost base and better positioned to take further market share. UBS’ key picks in this space include:
By the looks of management commentary from reporting season, this pent-up demand isn’t going anywhere soon:
“... travel demand, which remains very robust, particularly for leisure. While interest rates and inflation are expected to hit discretionary spending at some point, we’re yet to see any signs of that in our bookings. In fact, the research shows travel is one area that people want to prioritise over the next 12 months.” – Qantas CEO Alan Joyce
“This underlines both the significant pent-up demand that still exists for travel in this early recovery phase and the sector’s proven resilience. While travel is a discretionary purchase, customers typically view it as essential and prioritise it above other discretionary items.” –
Flight Centre CEO Graham Turner
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