Reporting season always throws up results that bring an instant reaction from the stock market – particularly on revenue or profit “beats” and “misses” – when more thorough later analysis shows that the result may have been better than it looked. Here are 5 situations from the recent reporting season where this was arguably the case.
1. Kogan.com (KGN, $4.00)
Market capitalisation: $375 million
Forecast FY20 dividend yield: 4%, fully franked
Analysts’ consensus target price: $5.00 (FN Arena), $5.38 (Thomson Reuters)
Online retailer Kogan.com reported a slip in interim profit – down 11%, to $7.4 million – with the interim dividend cut from 6.9 cents to 6.1 cents on the back of that. The market did not like the look of the company’s growing pains, with “variable costs” – mostly an expanded warehousing footprint – surging by 27.5%, accompanied by a 22.1% rise in marketing spending and a 15.9% lift in people costs. Inventories surged by 85%, to $92.9 million.
But there were plenty of positives in the result, such as a 10.6% gain in revenue to $231.8 million; an improvement in gross margin, from 19.4% in the first-half of FY18 to 19.5%; and a 32.2% lift in active customers, to 376,000. Kogan Mobile lifted its gross profit to $45 million, from $40 million.
The business had already reported (in January) that its Christmas 2018 trading period had been the best Kogan.com had ever had, and that momentum flowed into January 2019, with unaudited revenue up 13% and gross profit up 19.9%, tempered by a 7.3% jump in operating costs. Kogan.com said it was expanding Kogan Money into additional financial services verticals, having establishing strong partnerships with Mercer and Citibank, and it had launched Kogan Money Home Loans, in partnership with Adelaide Bank and Pepper. The company operates in the tough consumer discretionary sector, where a bank lending crunch, falling house values, stagnant wage growth and soft economic data all represent headwinds, but Kogan.com appears to have room to grow.
2. Carsales (CAR, $12.71)
Market capitalisation: $3.1 billion
Forecast FY20 dividend yield: 3.7%, fully franked
Analysts’ consensus target price: $13.83 (FN Arena), $13.40 (Thomson Reuters)
The market was expecting a soft result from online vehicle marketplace Carsales, as falling demand for new cars was well-known, but car makers pulled back on display advertising in the December half in “an unprecedented fashion,” as broker Morgans put it. Carsales’ display advertising revenue fell 16% in the six-month period, to $29.9 million, and the company’s finance and related services business also felt the impact of credit tightening resulting from the financial services Royal Commission and recent Australian Securities & Investments Commission (ASIC) legislative changes. Add the effect of a $48 million impairment against the company’s stake in auto finance company Stratton Finance, and Carsales reported an 82% drop in first-half profit, to $11.1 million: an unimpressed stock market took CAR shares 5.5% lower, notwithstanding the fact that adjusting for the Stratton write-down, profit was down 2%. The interim dividend was maintained at 20.5 cents a share, fully franked.
Behind the display downturn, the core domestic classifieds business remained solid, with dealer revenue up 8% and private revenue 12% stronger. In addition, the international businesses had an excellent December half, with the wholly owned SKEncar business in South Korea boosting earnings by 22% (in local currency) and the Latin American operation lifting earnings by 52% (in local currency), driven by the Brazilian business Webmotors, of which Carsales owns 30%. The company says Brazil’s success provides the “strategic roadmap” for Carsales’ earlier-stage Latin American businesses in Mexico, Argentina and Chile.
It is still early days for the international businesses, but they lifted their combined contribution to total revenue from 2.9% at December 2018 to 15.3% at December 2019: Asia’s revenue contribution grew by more than 17 times, from $1.8 million to $31.3 million. The strong earnings growth in the company’s two largest overseas investments was a big positive, but was over-shadowed by the Australian display advertising downturn.
3. GUD Holdings (GUD, $12.98)
Market capitalisation: $1.1 billion
Forecast FY20 dividend yield: 4.8%, fully franked
Analysts’ consensus target price: $13.60 (FN Arena), $12.78 (Thomson Reuters)
Automotive parts and pumps business GUD Holdings was hit by some of the same headwinds as Carsales in its first-half result, with a 3% rise in bottom-line net profit, to $29.3 million, well below market expectations. Investors were also concerned by a slide in profit margins in the automotive business – the major part of GUD – and the flat sales and the 21% fall in underlying EBITDA (earnings before interest, tax, depreciation and amortisation) in the Davey water products business, because of lower demand due to drought in the eastern part of the country. (Following two years of restructuring, sales and acquisitions, Davey is the only non-automotive part of the business.) The upshot was a 13% fall in the share price on the day the result was released.
But the GUD result did not deserve that reaction. For a start, falling new car sales and consumer reluctance to spend actually plays to the company’s strengths – spending on mechanical services, parts and accessories rises as drivers try to get more life out of existing cars; this is not discretionary spending. The company remains confident that organic growth in the automotive business will return to 8% plus in the current half and that it can produce operating earnings growth of about 11%. The recent addition of the Disc Brakes Australia (DBA) and AA Gaskets businesses to the GUD portfolio has strengthened it, in particular DBA (bought in July 2018) exposes GUD to multiple segments of the market – replacement, 4WD/SUV, performance, towing, military and heavy vehicles – and brings with it major disc brake rotor export opportunities in Europe, the USA, the Middle East, Russia and Asia.
4. Qantas Airways (QAN, $5.66)
Market capitalisation: $9.1 billion
Forecast FY20 dividend yield: 4.3%, fully franked
Analysts’ consensus target price: $6.05 (FN Arena), $6.87 (Thomson Reuters)
Qantas was another company to bring out a weaker-than-expected half-year result, posting a 16.3% fall in interim net profit, to $498 million, on the back of revenue of $9.2 billion, up 6%. Underlying profit before tax, which strips out some one-off items and is considered a more accurate indication of financial performance, fell 18.7% to $780 million. The major surprise to the market was the rise in the airline’s total fuel bill, which jumped by 26.3%, to $2 billion. For the FY19 full-year, Qantas expects its fuel bill to come in at $3.9 billion, up 21% on FY18.
Higher fuel costs particularly affect the international business: in the December half, a $219 million increase in fuel cost drove a 60% fall in international’s underlying earnings to $90 million. Qantas’s domestic business reported underlying earnings of $453 million for the first half, up slightly from $449 million in the December 2018 half-year, while the Jetstar business posted a 20% fall in underlying earnings to $253 million.
Qantas did say that it was confident that higher fuel costs for FY19 would be fully recovered by the end of the year, and that it was “fully hedged” on fuel cost for FY20; it also said that strong forward bookings, slowing capacity growth for international competitors and declining oil prices pointed to a “strong second half.”
Despite the shortfall in profit expectations, investors did like the announcement of a $500 million shareholder return, comprising an interim dividend of 12 cents a share, fully franked, and an on-market buyback of up to $305 million.
5. Citadel Group (CGL, $7.32)
Market capitalisation: $361 million
Forecast FY20 dividend yield: 2.2%, fully franked
Analysts’ consensus target price: $8.48 (Thomson Reuters)
Managed services and software provider Citadel Group had a shocker when it released its half-year result last month: the shares fell by 22%, after the company reported that net profit from continuing operations rose by 5.4%, to $5.1 million, on the back of revenue that grew by 5.5%, to $49.1 million. It goes without saying that these were weaker numbers than the market was expecting, but arguably, analysts (and investors) were not looking at the right numbers. Citadel has put a lot of work into refocusing its sales effort toward scalable Software-as-a-Service (SaaS) solutions for customers that provide annuity (recurring) revenue streams: that showed in the December half-year with SaaS revenue surging by 39.1% to $16.8 million, to represent just over one-third of total revenue.
The company has transformed itself from a business providing specialist advisory, training and technology services to government departments, to a technology company providing a comprehensive suite of scaleable enterprise information management SaaS solutions to both government and private sector customers. But the cost of this transformation – both in the R&D work, and in the fact that increasing the proportion of recurring revenue sees upfront revenues reduced, in exchange for higher total revenue being generated over an extended period of time – has dampened earnings growth. The market may not yet fully appreciate this.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.