February is one of the most anticipated months of the year. Not because of Valentines Day, Chinese New Year or even the hot weather. No, February is the month to watch for Australian investors as reporting season kicks off.
We’re well into the thick of earnings season for the month and after a year of lockdowns, deferred dividends and a significant lack of earnings growth, the February 2021 reporting season was one of the most anticipated.
To say it has got off to a flier would be an understatement. Investors have breathed a sigh of relief as:
- CBA (ASX: CBA) increased its dividend by 50%,
- JB HiFi (ASX: JBH) profit increased by 86%, and
- BHP Group (ASX: BHP) declared its highest-ever dividend.
In this video, large-cap manager and CEO at Elston Group, Andrew McKie unpacks the beginning of the February reporting season – detailing the biggest surprise and the ASX warrior who disappointed the market. McKie also provides his thesis behind the ASX stock he is most closely watching into reporting season, analysing why post-COVID tailwinds should allow for its healthy recovery.
What company surprised you most this reporting season
A positive surprise for us was James Hardie. We’ve owned James Hardie for a few years now, and although we knew that there would be some recovery to housing starts in the U.S., which is really the shining light division for Hardie’s, it’s come in obviously a lot stronger. So the property market in the U.S. is very strong. Similar drivers to what we’re starting to see here in Green Shoots in Australia, as well. Housing starts are the highest since 2006 in the U.S. now, so that was a very good result in terms of sales growth, but also margin expansion. If we look at the opportunities that we have in large caps, two years ago, Hardie’s in February ’19 was somewhere around $17 a share. And the market was looking at the business as a cyclical building materials business, whereas we saw it as a structural growth story.
As fibre cement takes market share in the U.S, as they penetrate that market, they had the ability to grow sales, independent of what was happening with housing starts. And then from an efficiency point of view, we saw some improvement there in their margins as well, as they convert those sales to higher EBIT margins as well. So, now we’ve been lucky enough that there has been also that recovery in volumes, but it’s doing the work on the core drivers of revenue and expenses to identify where the market is underestimating the growth potential of that business site. And that’s a classic case of that two years ago versus where we are now.
What company disappointed you this reporting season?
In terms of what we own, Origin has pre-announced their earnings at the time, as we speak. It’s energy markets, so wholesale electricity prices are really below their costs of production. So, that’s been a challenging division for them in the short term and where we see that long term. But there’s a slight miss there, and that’s probably an area of disappointment, but at this point, we’re actually reasonably happy. We’ve had some very good results from Hardie’s, I mentioned. From Macquarie, from Virgin Money, from Amcor. Some core sort of positions for us. So fingers crossed, it’s going reasonably well for us.
What company are you most looking forward to hearing from this reporting season?
It’s a little bit boring, but Ramsay Health Care. So with health care, you’re really looking at that defensive earnings profile and Ramsay being a private health provider does have a history of very good long-term growth in revenues. They’ve got that demographic support in terms of population growth, as well as an ageing population. But they have been impacted by COVID, which has really provided an opportunity for us to buy Ramsay at what we think is a discount to its long-term intrinsic value, due to that short-term COVID disruption.
They’ve had, in some instances, a lot of their hospitals have been shut, or they’ve been helping governments with dealing with COVID, particularly the UK and France. And so elective surgeries, they haven’t had that come through. They’ve had elevated costs.
So, the short-term uncertainty for us is providing that longer-term opportunity to buy a quality business. So we’ll be interested to see, particularly for domestic Australia, as we’ve done a little bit better from a containment point of view, how strongly are elective surgeries coming back? Because there will be a huge catch-up in demand there, we think, for elective surgeries as well. So that’s one to watch, we think for us to see if that thematic is right and that Ramsay is well-positioned for that recovery.
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