September, 2023
The Wholesale Australian Share Fund outperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the September quarter.
Contributing to the Fund’s outperformance were overweight positions in healthcare imaging software company Pro Medicus (PME) and cloud connectivity services company Megaport (MP1). A high quality FY23 earnings result and new contract win in the September quarter underpinned a rise in +27.3% Pro Medicus. PME delivered strong double digit growth across a number of key financial metrics including a 34% increase in revenue and +36% rise in EPS.
Pleasingly, PME produced an EBIT margin of 67% and Management anticipates that these solid margins are to remain broadly in line with these levels in the near term, reiterating the highly scalable operating leverage within the business. Another key takeout was the improvement of PME’s implementation speed, the Company actioned 8 cloud-based implementations in the year. As cloud adoption continues to accelerate we believe PME will be well positioned to capitalise on new opportunities. Later the in quarter, PME announced a new $140M, 10-year contract with not-for-profit IDN Baylor Scott & White, the largest of its kind in Texas and one of the largest in the United States. We were also encouraged to see that the new contract included PME’s ‘full-stack’ of products Visage 7 Open Archive, Visage 7 Workflow and Visage 7 Viewer, which has been a trend in a number of new contracts won in FY23. The ‘full-stack’ trend underscores PME’s growing penetration of the North American market as well as further validating PME’s unique and market leading imaging technology. In our view, the deal re-emphasises PME’s robust business model and reiterated to us that the Company is still in the early stages of capturing market share in a large addressable with short to medium term drivers being continued innovation and development in key growth areas including cardiology, a healthy contract pipeline with leads gained from the recent Radiological Society of North America (RSNA) conference, growing demand from existing and new customers for PME’s full stack of products and ramp up of large contracts.
Megaport (+63.0%) rose strongly the September quarter following two reasonably positive updates in July. Firstly, MP1 came to market early to upgrade its FY23 and FY24 guidance, while also announcing strong cash flow outcomes. Later in July, MP1 announced its 4Q23 Quarterly Update which we believe was a robust update. Although the quarterly update meant that the FY23 result was then largely pre-released, positive sentiment further compounded in August. The key driver of the strong performance was driven by the Company’s update to its FY24 EBITDA guidance which is now expected to fall in the range of $51M to $57M and is an impressive increase of ~152%-182% versus MP1’s FY23 earnings of $20.2M. Additionally, FY24 revenue was guided to $190M to $195M and Management confirmed that it expects to be net cash flow positive for the entirety of FY24. On other metrics, MP1 delivered 40% revenue growth YOY and indicated that aggregate customer lifetime value increased to 30% and is reflective of an increase in customers (+8%) and Customer Lifetime Value with customers on average using MP1’s services for 9 years. Moving forward, we maintain our conviction in MP1 given the Company is the global leader in cloud connectivity, we believe enterprises and Governments are still early in the cloud migration journey and MP1 is a share gainer, with its customers subscribing for more services over time, illustrating the power of the offering.
Somewhat offsetting these positive contributions was negative contributions from the Fund’s overweight positions in logistics solutions company WiseTech Global (WTC) and global fintech Block (SQ2). WiseTech Global declined -18.4% in the September quarter due to disappointing FY24 EBITDA guidance that was materially below market forecasts and disappointingly overshadowed the strong FY23 earnings result. WTC guided to revenue and EBITDA growth of 27%-34% and 18%-27% respectively, missing expectations given the dilutive margin impact of recent acquisitions and a step up in R&D reinvestment. We were encouraged by WTC’s strong FY23 financial performance which included revenue increasing +29% to $817M and underlying earnings rising to $417M.
During the year, WTC secured six new Large Global Freight Forwarder (LGFF). We remain bullish on the long-term trajectory of the stock given recent acquisitions of leading US landside logistics software companies Envase (trucking) and Blume (rail, intermodal). These acquisitions provide WTC with a leading and unique position in the highly fragmented US landside logistics software market. This segment is highly complementary to their core freight forwarding operations and significantly expands WTC’s total addressable market. Accelerating contract wins post-COVID with major global freight forwarders including UPS and FedEx and more recently a global rollout of customs module with Kuehne & Nagel (world’s largest freight forwarder) has reinforced our conviction in the WTC as the unrivalled market leader.
Block (-28.7%) was a key detractor for the Fund in the September quarter, despite reporting solid top-line growth (+19%) and upgrading its profit guidance in the 2Q23 results. We suspect that the market was hoping for a larger profit guidance upgrade given the SQ2 has demonstrated the ability to generate operating leverage over the past two quarters so far. We remain positive on the stock as we expect SQ2 will be able to deliver further profit margin expansion, along with sustainable revenue growth into the short and medium-term. We estimate SQ2 to grow 22% on a 3-yr compound annual growth rate and deliver the ‘Rule of 40’ (growth + margin) by FY27e. As the Company continues to deliver on its results and track towards its medium-term targets, we see these as possible catalysts for a re-rating in the stock.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Wholesale-Australian-Share-Fund-Adviser-Quarterly-9.pdfJune, 2023
The Wholesale Australian Share Fund outperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the June quarter.
Contributing to the Fund’s outperformance were overweight positions in cloud accounting services provider Xero (XRO) and cloud connectivity services company Megaport (MP1). Xero rallied +33.0% higher in the June quarter with positive momentum stemming from a robust FY23 result (March Year End) that surpassed consensus expectations. A key highlight was the strong top line growth with revenue increasing +28% YoY supported by solid subscriber growth (+14% to 3.74m) and 10% lift in average revenue per user (ARPU). ARPU was supported by price increases, upgrades and strong uptake of platform adjacent products such as payroll and payments. Despite macro challenges faced in the past year, average monthly churn remains low at 0.9%, a testament to the sticky and vital services XRO provides and pleasingly, free cash flow also rose from FY21 NZ$2m to FY22 NZ$102m. We are of the belief that the new CEO’s focus on profitability and disciplined cost controls are evident in XRO’s target for operating expenses to fall from 82% to 75% of revenue in FY24 supporting further margin expansion, higher profits and greater free cash flow.
Megaport rallied +75.2% higher in the June quarter given its largely positive 3Q23 trading update made in April. In the result, the Company reported solid financial metrics including record monthly recurring revenue (MRR) which increased +14% QoQ, as well as positive growth across key KPIs for MCR and MVE. MP1 also flexed the benefits of its recently implemented initiatives including its cost out program, workforce resizing and recent Cloud VXC price increase resulting in Management citing that normalised earnings for FY23 and FY24 will be ‘materially’ above market expectations of $9M and $30M respectively, instead, guiding to be in the range of $16M-$18M and $41M-$46M. We were also pleased Management is working to rebuild its direct sales channel in order to reaccelerate sales momentum in support of solid market demand. Looking forward, we maintain our conviction in MP1 given they are the global leader in cloud connectivity, MP1’s customers subscribe for more services over time, illustrating the power of the product; we are still early in the cloud migration journey and MP1 is a share gainer; and whilst the Company’s ‘self-help’ measures have delivered immediate benefits, further benefits should continue to unfold.
Somewhat offsetting these positive contributions was the Fund’s zero-weight position in major bank Australia and New Zealand Bank (ANZ) and overweight position in diversified miner Mineral Resources (MIN). Australia and New Zealand Bank rose +7.0% in the quarter, outperforming the broader market. The major bank released its 1H23 result in May, presenting a 12% increase in cash profit compared to 2H22. ANZ’s net interest margin (NIM) increased by 7bps to 175bps however, similar to its peers, the Company indicated that the benefits of higher interest rates was decelerating as deposit and mortgage loan competition intensifies. Investors were also generally pleased with the proposed fully franked interim dividend of 81c (+9.5%). Later in the quarter, ANZ announced an agreement with the Queensland government as part of its proposal to acquire Suncorp Bank. The jobs and investment agreement promises to establish a ‘tech hub’ in Brisbane subject to the completion of the acquisition, following required approvals from the Australian Competition and Consumer Commission (ACCC) & Federal Treasurer.
Mineral Resources was driven -11.4% lower in the June quarter given a softer than expected 3Q23 exploration and mining activities report. MIN’s 3Q23 result was driven predominantly by weaker performances from its lithium and mining services businesses culminating in guidance downgrades. Cost pressures were also evident in the result with costs guided to the upper end of its range for iron ore and guidance revised higher for its Mt Marion operations given delays in plant expansion and higher strip. The miner recovered some ground later in June with the announcement of a natural gas discovery at North Erregulla Deep-1 (NED-1) and positive early exploration results at Mt Marion. MIN also announced an early termination of its loss-making agreement with ganfeng which is therefore expected to be value accretive in the near term and has been seen positively. We remain attracted to the diversified miner given their strong capital management and robust growth pipeline that is expected to support robust medium and long term returns.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Wholesale-Australian-Share-Fund-Adviser-Quarterly-8.pdfDecember, 2022
The Wholesale Australian Share Fund underperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the December quarter.
Contributing to the Fund’s underperformance were the overweight positions in essential human services provider APM Human Services (APM) and building materials company James Hardie (JHX). APM Human Services (-19.6%) underperformed in the December quarter following concerns regarding FY23 earnings forecasts given the slower-than-expected ramp up of the UK restart employment programme and higher borrowing costs following recent interest rate rises. We remain attracted to APM’s strong growth pipeline within their core divisions with many of the government programmes such as Workforce Australia, in their early phases of multi-year opportunities, as well as continued investment and development in other growth areas including Allied health and their Disability and Aged Care Support Services business. We are of the view that APM faces a number of tailwinds in the medium term including benefit from 15,550 Disability Employment Services (DES) participants being relocated from underperforming service providers, as new Workforce Australia and Canadian contracts ramp up and recent acquisitions including Equus and Everyday Independence make contributions. Therefore, APM’s strong organic and inorganic growth coupled with accelerating scale as the constituent expands within existing and new geographical markets should bolster profit growth in 2H23 and FY24.
We continued to adjust the Fund’s holdings across a variety of sectors in the December quarter.
We added to our holdings in a lithium miner over the December quarter. The company owns 25% of a high quality, long life spodumene asset in Western Australia and 49% of a lithium hydroxide downstream facility. Lithium accounts for 85% of our valuation with exposure to strong lithium pricing driven by Electric Vehicle demand. The remaining valuation is attributed to its nickel business consisting of two mines in Western Australia, with nickel sulphide another benefactor of the accelerating EV transition.
We also took the opportunity to introduce a mining services and operations company to the Fund. We were attracted to the company’s diversified business divisions, consisting of two lithium mines, an iron ore business and mining services business, as well as the miner’s strong leadership team whom we see as focused on delivery expansions within all three businesses. The miner has also recently made a gas discovery in the Perth Basin with the potential for development in the next few years.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Wholesale-Australian-Share-Fund-Adviser-Quarterly-7.pdfSeptember, 2022
The Wholesale Australian Share Fund outperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the September. The Fund continues to diligently navigate through periods of volatility through application of our be-spoke fundamental research process, allowing us to identify high quality, growth stocks that we believe will generate superior returns for our investors over time.
Contributing to the Fund’s outperformance were the overweight positions in logistical solutions company WiseTech Global (WTC) and cloud connectivity services provider Megaport (MP1). An upgrade to guidance in July instigated positive market sentiment for WiseTech Global as the company increased their EBITDA guidance range from $275-295m to $310-$320m and also indicated that revenue would reach the upper end of their current range. Optimism compounded further after releasing a convincing full year earnings result strengthened by continued global rollouts of their best-in-class Cargowise platform, new customer wins, increasing customer usage and innovative product enhancements. All of which supported a 25% yoy increase in revenue - the top end of their guidance - and robust EBITDA margin of 50%. Key rollouts in the year included the likes of UPS, FedEx and Craft Multimodal, the former taking WTC’s overall large global freight forwarder (LGFF) count to 10 of the top 25 global freight forwards, signalling growing momentum and accelerating penetration in the logistical solutions space. As a dominant market leader, we remain attracted to WTC’s ability to exert a high degree of pricing power to offset inflationary pressures demonstrated by the price increase made in the second half of the year. The combination of accelerating momentum and strong pricing power should place WTC in good stead to continue generating attractive sales growth over the medium to long term.
Similarly, a strong fourth quarter trading update and full year results propelled Megaport +42.9% in the quarter. The market was encouraged by growth in all key regions and a number of strong KPI results including 24% increase in average revenue per customer, +9% rise in average services per customer and +16% increase in total customers. We were also pleased to see an acceleration in monthly recurring revenue (MRR), increasing from $9.2m to $10.7m yoy. We maintain conviction in the strength of MP1’s global footprint which reinforces its offering, as MP1’s network spans over 750 data centres in 25 countries. The company has built a rich, global ecosystem that is a key attraction for enterprises, data centre operators and cloud service providers (CSPs), a key competitive advantage. We believe that MP1 has a strong long term growth pipeline and forecast annual sales growth for MP1 of over 40%.
Somewhat offsetting these positive contributions were the overweight positions in the digital payments company EML Payments (EML) and industrial and commercial property manager Goodman Group (GMG). The EML share price dragged -35% lower in the quarter following a series of disappointing announcements including the resignation of EML’s CEO, a mixed update on the Irish regulator issues and report of fraudulent activity in a minor division. Whilst we also found the cash flow and cost base performance disappointing in the August result, we note that the underlying growth of EML’s core division remains solid having delivered 26% volume growth in 2H22 suggesting that customer demand remains strong despite the regulatory review. We maintain that after the remediation program is completed, EML should be able to deliver operating leverage and we expect mid-teen earnings growth to be achieved longer-term with ROIC reaching the 20s. We are of the view that the market has over-extrapolated these issues and EML remains an attractive investment at this price
The rising rate environment and corresponding poor sector sentiment drove Goodman Group -11.6% lower in the quarter. The acceleration of the ecommerce and logistics industry remains a long term structural tailwind for GMG’s business and strong demand coupled with low supply should continue to underpin strong rental growth to help combat rising costs. We were encouraged by evidence of this in GMG’s full year results in August which detailed double digit increases to operating profit and EPS growth at 25% and 24% respectively as well as an average 99% occupancy rate. Management also indicated rental reversion to the market for North America (40%), Australia and New Zealand (20%), Europe and UK (18%) and Asia (4%), highlighting significant opportunity for growth. We believe that GMG maintains a good level of liquidity and cash to allow for a nimble approach, providing the flexibility to react to a volatile environment as well as leverage their strong global position to capitalise on new opportunities.
In the September quarter, we continued to carefully assess the Fund’s current positions and sought to strengthen those where our conviction continues to build and reduce those that presented more risk.
We removed digital settlements company Pexa (PXA) from the Fund as rising interest rates continue to slow the property market, creating a headwind for PXA’s services including property transfers. Property transfers are expected to fall by ~10-20% over FY23 as they moderate from elevated FY22 figures.
We also exited from our position in Domino’s Pizza (DMP) as continued concerns around the performance of Europe given high inflation and the RussiaUkraine war has slowed store rollout and will potentially impact the profitability of store owners and corporate stores. We are of the view that high inflation will restrict the earnings performance in all regions as DMP will be expected to aid franchisees in the volatile period ultimately impacting earnings in the short run.
These funds were partially used to introduce a lithium miner to the Fund. The miner owns a high quality, long life spodumene asset and lithium hydroxide downstream facility. Lithium accounts for 85% of our valuation with exposure to strong lithium pricing driven by Electric Vehicle demand. The remaining valuation is attributed to its nickel business with nickel sulphide another benefactor of the accelerating EV transition.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Wholesale-Australian-Share-Fund-Adviser-Quarterly-6.pdfJune, 2022
The Wholesale Australian Share Fund underperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the June quarter but continues to deliver attractive levels of excess returns over longer periods as our be-spoke fundamental research process allows us to identify high quality, growth stocks that we believe will generate superior returns for our investors over time.
Contributing to the Fund’s underperformance were the overweight positions in the digital payments company EML Payments and cloud connectivity services provider Megaport (MP1). EML Payments (-59%) continued to de-rate in the June quarter alongside other tech and payment names. A FY22 trading update in April lowering profit guidance accelerated a downward trajectory for EML given cuts were 8% lower than consensus expectations. The downgrade was largely attributed to a loss in non-recurring revenues and higher costs in the European business related to the Central Bank of Ireland’s remediation process. While disappointing, we believe these issues are very short term and maintain a positive growth outlook for the company following the resolution of the remediation process. We remain attracted to EML as its Australian and North American businesses performed in line with expectation and core business grew ~18% in the third quarter, demonstrating robust growth in their underlying business. We are also optimistic about the pipeline of growth particularly as they enter the ~A$88bn Employee Benefits Market through their latest partnership with Up Spain and look to pursue further penetration within the open banking market through their NuPay products.
We adjusted the Fund’s holdings across a variety of sectors through the quarter, particularly Financials, Energy and Materials. Adhering to our long-standing DCF valuation sell discipline, we have exited our position in the copper-gold minder Oz Minerals as it approached our valuation target. With copper prices falling we believe there is increased risk on OZL’s development profile, particularly in West Musgrave. The company also released a trading update whereby lowering copper production guidance at Carrapateena and increasing cost guidance due to COVID related absenteeism and equipment issues.
We also exited Westpac (WBC) as our outlook for the bank has softened given our expectation for slowing credit growth as interest rates rise, house price gains moderate, and consumer and business confidence continue to recede. Slowing activity is also likely to impact fees and commissions. While rising interest rates are positive for bank net interest margins (NIM), the impact of competition and rising funding costs will blunt this. We do not see a significant asset quality cycle ahead. However, the banks will see higher loan impairment expenses (LIE) as they raise provision levels to reflect the downgraded economic outlook. We see better opportunities elsewhere given these headwinds.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Wholesale-Australian-Share-Fund-Adviser-Quarterly-4.pdfMarch, 2022
The Wholesale Australian Share Fund underperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the March quarter but continues to deliver attractive levels of excess returns over longer periods as our be-spoke fundamental research process allows us to identify high quality, growth stocks that we believe will generate superior returns for our investors over time.
Contributing to the Fund’s underperformance were the overweight positions in building materials company James Hardie (JHX) and accounting software developer Xero (XRO). JHX (-27%) faced a tough start to the quarter following the departure of its CEO Jack Truong. JHX continued to move lower in light of the Russia-Ukraine war and as its impact materialised through softening European activity, increased energy, freight and pulp costs, and rising mortgage rates in the US. JHX’s North America Fibre Cement business is 70% exposed to the residential repair & remodel (R&R) segment, with the remaining 30% exposed to the single family new construction market. In our view, the R&R market is likely to hold up in the face of rising mortgage rates given strong house price appreciation in the US, significant levels of home equity, strong employment, and a shortage of new housing stock. We remain confident in JHX’s ability to control costs and their pipeline of new products and projects to generate returns as they continue to expand their global presence. The cloud-based business XRO (-27%) was no exception to the indiscriminate sell-off in technology companies as the prospect of interest rate hikes increased and news of the Russia-Ukraine war unsettled the market. Despite the market’s view on a rising cost of capital, the fundamentals of XRO remain attractive.
We maintain our positive outlook for XRO given the ongoing strong growth in cloud computing and product development, recognised as XRO reached 3m subscribers for the first time in 1H22 (23% YOY growth). Although subscribers are mainly located in Australia, New Zealand and the United Kingdom XRO has a large addressable market and are on track for building momentum in Singapore, South Africa and North America.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Wholesale-Australian-Share-Fund-Adviser-Quarterly-3.pdfDecember, 2021
The Wholesale Australian Share Fund underperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the December quarter but continues to deliver attractive levels of excess returns over longer periods as our be-spoke fundamental research process allows us to identify high quality, growth stocks that we believe will generate superior returns for our investors over time.
Contributing to the Fund’s underperformance were the overweight positions in Australia’s leading BNPL company Afterpay (APT) and the international pizza chain company Domino’s Pizza (DMP). The prospect of increased regulation in Australia and the US combined with the growing expectation of rising interest rates drove the broader BNPL sector lower through the December quarter. With APT (-32%) under takeover, Australia’s leading BNPL firm also followed the performance of its soon-to-be parent company Block (SQ-US). Block moved lower through November after releasing its third-quarter trading update, which showed a softening in its Cash App, with gross profit missing consensus expectations by 5% due to reduced stimulus in the US and lower Bitcoin volumes, while firm-wide gross profit grew 43% year-on-year. A surprise to the market was the increase in management’s guidance for operating expenses in FY22, which Block will use to boost customer acquisition activity across its Seller App while investing in commerce capabilities and financial services products in its Cash App.
Positively, the APT-Block transaction was approved by APT shareholders partway through December, with just under 100% of shareholders voting in favour of the deal. We continue to hold APT in an overweight position as we believe the APT-Block transaction makes strategic sense for both companies, with APT to be used as the link between Block’s Cash App and Seller ecosystem.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Wholesale-Australian-Share-Fund-Adviser-Quarterly-2.pdfJune, 2021
The Wholesale Australian Share Fund outperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the June quarter and continues to deliver attractive levels of excess returns over longer periods as our be-spoke fundamental research process allows us to identify high quality, growth stocks that we believe will generate superior returns for our investors over time.
Contributing to the Fund’s outperformance were the overweight positions in the cloud connectivity services provider Megaport (MP1) and the leading radiology software provider Pro Medicus (PME). MP1 rallied +66% in the June quarter as it benefited from a strong third-quarter result and an investor update that showcased its latest product offering. The third-quarter result highlighted ongoing growth in installed data centres, customers and ports thanks to its global footprint and high-quality network. As a result, MP1 delivered a 10% increase in underlying monthly recurring revenue, its second highest quarterly increase ever. Management noted that the strong demand had continued into the next quarter as the digital transformation accelerates. In June, MP1 showcased its latest evolution of the Megaport Virtual Edge (MVE), which covered: its SD-WAN solution, in collaboration with various industry leading vendors; case studies for both small and large enterprises; expected pricing; and MP1’s sales plan. With MP1’s network serving as the ‘underlay’ over which SD-WAN providers can sell networking services, and having already inked deals with four major vendors that account for ~50% of the SD-WAN market, MP1 is well-positioned to benefit from a fast-growing industry as enterprises increasingly use cloud-based technology
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Wholesale-Australian-Share-Fund-Adviser-Quarterly-1.pdfMarch, 2021
We believe stronger returns are achieved by investing in growing companies that generate consistent returns and reinvest above their cost of capital. In-depth industry, stock and valuation analysis is the foundation of our process. The Fund predominantly invests in quality Australian companies with strong balance sheets, earnings growth and high or improving returns on invested capital.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Wholesale-Australian-Share-Fund-Adviser-Flyer.pdfSeptember, 2020
The Wholesale Australian Share Fund delivered another strong quarterly return as it outperformed its benchmark, the S&P/ASX 300 Accumulation Index, by more than 5%. Over the longer term, the Fund has delivered consistent outperformance through both up and down markets as our growth and quality focus combined with a fundamental research approach helps identify companies with above-market growth potential, high-quality earnings and robust balance sheets. This is particularly pleasing given the volatility experienced by capital markets over the 2020 calendar year.
Contributing to the Fund’s outperformance were the overweight positions in the Buy-Now-Pay-Later firm Afterpay (APT) and the building materials company James Hardie Industries (JHX). Afterpay moved +31.2% higher through the September quarter as it benefited from an impressive FY20 result and geographic expansion. The FY20 result highlighted continued customer growth, with an average of 25,000 customers added per day in the fourth quarter. Pleasingly, all geographies achieved strong top line growth while net transaction loss declined – proving the effectiveness of APT’s inherent risk management technique of disabling purchase activity on accounts that have missed payments. Adding further support were the announced expansions into both Europe and Asia and news that the platform had gone live in Canada. Increased concerns of competition dragged on APT in the final stages of the quarter, however we believe Afterpay boasts a differentiated product that focuses on building a loyal customer base and connecting them to retailers, both online and in-store.
James Hardie Industries rallied in each month of the September quarter and ended+20.4% higher. The company delivered a high quality first quarter result in early August, which detailed growing momentum following the closures caused by the coronavirus, improved manufacturing efficiency, and positive FY21 guidance. Housing data out of the US continues to show share gains for fibre cement, JHX’s core product, and industry feedback implies a continued improvement in end market demand. We remain attracted to JHX given our belief that it is well positioned to navigate through the coronavirus uncertainty.
Looking forward, JHX’s ability to grow fibre cement volumes at a greater rate than the US housing market while also maintaining strong operating margins should drive robust earnings growth.
Somewhat dragging on the Fund’s performance were the overweight positions in The a2 Milk Company (A2M) and EML Payments (EML). A trading update released late in the quarter drove A2M -24.7% lower. The company warned that stage four lockdowns in Victoria and travel restrictions have hindered sales through the corporate daigou and reseller channels given the decline in international tourists and students. Management lowered first-half FY21 guidance as a result. Despite the temporary headwind, the rest of the business has remained robust with Chinese MBS experiencing sales and market share growth in July and August. Positively, A2M confirmed that the upcoming “Singles’ Day” may help clear excess stock and that the liquid milk businesses in Australia and the United States were performing strongly. We continue to believe in the long-term growth opportunities available for A2M given its strong execution track record, growing product suite and geographic footprint.
EML Payments declined -14.7% through the September quarter as travel restrictions and lockdowns threatened retail activity. A mixed FY20 result added further pressure to the share price in August despite an operationally good result with a 25% increase in revenue. The market instead focused on the 5% miss to consensus earnings expectations and the absence of FY21 guidance given the volatility caused by the coronavirus on EML’s Gift & Incentive programs. We believe EML is well-placed in a recovery given its technology and focused strategy to deliver a seamless product to its clients. Additionally, EML completed its acquisition of Irish fintech, Prepaid Financial Services (PFS), under favourable terms, which will allow the business to maintain its net cash position. PFS is a high quality business, and will reduce the seasonality of EML given the majority of PFS is general digital banking and prepaid services for government or large corporate clients.
Fund Activity
We increased the Fund’s exposure to the Information Technology and Real Estate sectors through the September quarter. Within the IT sector, we added to existing positions in several payment solution providers and a cloud connectivity provider, given our view that data centre installations, customers and utilisation will continue to grow.
Purchasing activity in Real Estate sector was focused on building our positions in Industrial REITs. This is a reflection of our view that these assets will be beneficiaries of the shift to e-commerce as supply chains adapt and logistics operations adjust to changing consumer behaviours, especially in a post coronavirus era.
We funded these purchases primarily by lightening our holdings in the Industrials, Materials and Consumer Staples sectors. We originally added to our position in the toll road operator Transurban over April as traffic falls began to plateau across its key Australian and US assets. The stock has since enjoyed a solid rally as traffic numbers improved and so we have exited our position as the stock has approached our DCF valuation. Within the Consumer Staples sector, we have opted to take profits from a position in a major supermarket chain given the strength it has experienced from strong sales growth.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Wholesale-Australian-Share-Fund-Adviser-Quarterly.pdfticker: FSF0002AU
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Quarterly Factsheets have commentary only, make sure location is set to Australia not GLOBAL
Fund Performance+ Fund Activity sections from PDF
https://www.firstsentierinvestors.com.au/au/en/adviser/performance/literature.html
release_schedule:
fund_features:
First Sentier Wholesale Australian Share Fund offers a knowledgeable portfolio manager, a solid team, and a disciplined growth-orientated investment process. It aims to provide long-term capital growth with some income by investing in a broad selection of Australian companies. The option aims to outperform the S&P/ASX 300 Accumulation Index over rolling three year periods before fees and taxes.
- Investing in growing companies that generate consistent returns and reinvest above their cost of capital.
- Predominantly invests in quality Australian companies with strong balance sheets, earnings growth and high or improving returns on invested capital.
- In-depth industry, stock and valuation analysis.
manager_contact_details: Array
asset_class: Domestic Equity
asset_category: Australia Large Growth
peer_benchmark: Domestic Equity - Large Growth Index
broad_market_index: ASX Index 200 Index
structure: Managed Fund