September, 2023
The Fund returned negative 2.89% (after fees) for the month ending 30 September 2023, underperforming the ASX 200 Accumulation Index by 0.05%.
For the quarter ending 30 September 2023 the Fund returned negative 1.31%, underperforming the ASX 200 Accumulation Index by 0.55%.
CONTRIBUTORS TO RETURNS
Positive contributors included Incitec Pivot, Santos and QBE Insurance. Negative contributors included CSL, BHP (underweight), and Alumina. We discuss each further in our commentary below.
POSITIVE CONTRIBUTORS
Incitec Pivot
Incitec Pivot shares outperformed in September on the back of a strong ammonia price. The ammonia price rallied ~50% in September, driven by higher European gas prices. Incitec Pivot upgraded FY2023 production guidance for its Explosives division, but downgraded guidance for the Fertilisers division. The company also confirmed that it remains in discussions to sell its Fertiliser business.
Santos
Santos shares outperformed during the month as the oil price rallied more than 10%. Santos also hosted an investor tour to its Pikka project in Alaska, which was attended by one of our portfolio managers. The Pikka project is progressing well. In our view, it has strong potential to be extended in the future at high returns.
QBE Insurance
QBE Insurance shares outperformed as global bond yields increased by 30-50 basis points. September is the peak of the US hurricane season and Hurricane Idalia and Hurricane Lee have been the most notable events so far. However, losses appear to be within normal allowances for the insurance industry.
NEGATIVE CONTRIBUTORS
CSL
CSL shares underperformed alongside most other healthcare names in September. There was no company specific news.
BHP (underweight)
BHP outperformed in September on the release of improved Chinese economic data and the implementation of further policy easing measures by Chinese regulators. The iron ore price remained relatively flat at ~$120 per tonne over the month.
Alumina
Alumina shares underperformed during the month due to continued concerns on cash flow and gearing. We continue to believe Alumina will be permitted to mine higher grade bauxite areas post the conclusion of an EPA review in WA, which will alleviate cash flow and balance sheet pressure.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-24.pdfAugust, 2023
The Fund returned negative 2.37% (after fees) for the month ending 31 August 2023, underperforming the ASX 200 Accumulation Index by 1.64%.
Positive contributors included Domino’s Pizza Enterprises, Ampol and Medibank Private. Negative contributors included ResMed, Alumina, and SEEK. We discuss each further in our commentary below.
POSITIVE CONTRIBUTORS
Domino’s Pizza Enterprises
Domino’s reported an FY2023 result which was in line with the market update it provided in June. The stock outperformed after Domino’s revealed it has seen same store sales growth of ~7% in Australia and Europe since 30 June 2023. The positive start to FY2024 indicates that the worst of the impacts from inflation and reduced customer counts may now be behind it.
Ampol
Ampol shares outperformed after its 1H 2023 result showed strong performance across all divisions. The recently acquired Z Energy business continues to go from strength to strength. Interestingly, in the six months to 30 June 2023, premium fuel made up the highest percentage of total retail fuel sales than in any other time in history.
Medibank Private
Medibank shares outperformed following an FY2023 result that was modestly above expectations. Almost one year on from the cyber-attack in 2022, Medibank is growing policyholder numbers again and is targeting market share gains in FY2024.
NEGATIVE CONTRIBUTORS
ResMed
ResMed’s 4Q 2023 result disappointed the market as gross margin did not rise as expected. While this contributed to the share price fall, the larger factor was the rising risk associated with obesity drugs. One of the major obesity drugs, Wegovy, cited a 20% reduction in cardiovascular events in a study. While a sustained reduction in obesity levels across a large proportion of the population would have some negative impacts on ResMed’s business, we believe there are several complexities that are underappreciated. We believe the recent share price fall has been significantly overdone.
Alumina
Alumina shares underperformed after the company flagged higher costs as a result of mining in a low-grade area. We expect the business to be cashflow breakeven at current settings and the balance sheet net debt of $268 million is manageable. A key catalyst will be a return to mining high-grade bauxite areas in Western Australia post an Environmental Protection Authority review.
SEEK
SEEK shares underperformed after guidance for FY2024 earnings disappointed the market. While a reduction of new job listings was expected, SEEK flagged continued cost investment in the business through this period of cyclical softness. We are supportive of SEEK’s longer term approach to creating shareholder value.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-23.pdfJuly, 2023
The Fund returned 4.09% (after fees) for the month ending 31 July 2023, outperforming the ASX 200 Accumulation Index by 1.21%.
POSITIVE CONTRIBUTORS
Virgin Money UK
Virgin Money UK shares outperformed in July. The company announced it had comfortably passed the annual Bank of England stress test. Following the stress test results, Virgin Money UK confirmed that it intends to resume its share buyback programme before the end of FY2023 (30 September). Virgin aims to return to a target capital range of 13.0-13.5% versus its current 14.7%. We expect meaningful capital returns over the next 18 months for Virgin Money UK.
Incitec Pivot
Incitec Pivot shares outperformed as the company confirmed it had received a number of approaches for the potential acquisition of its fertilisers business. The Board will evaluate any offers alongside the proposed demerger of the business. In addition, ammonia prices appear to have found a floor after falling ~75% since September last year.
AGL
AGL shares continued to outperform strongly following its June update on FY2024 earnings guidance and long-term capex intentions. Of the $20 billion of investment that AGL has earmarked to be spent on the energy transition, roughly half will be on AGL’s balance sheet, with only $4 billion to be spent between now and 2030. This capex profile enables AGL to pay out 50-75% of profits as dividends, providing a strong, sustainable yield for investors.
NEGATIVE CONTRIBUTORS
CSL
CSL shares underperformed ahead of a key trial for a product that competes with CSL’s Immunoglobulin (IG) franchise. Positive results from the trial mean that the product, manufactured by Argenx, will now compete with CSL across ~25% of the IG market. Our view is that CSL’s IG revenue growth outlook is only slightly impacted due to growth opportunities across the rest of the portfolio.
Commonwealth Bank of Australia (no holding)
CBA shares outperformed along with the other major banks as softer Australian CPI data reinforced the view that the RBA’s hiking cycle may be over. While higher base rates are generally positive for bank net interest margins, the market is now more concerned about the negative impact higher rates could have on asset quality across bank loan portfolios.
Woodside Energy Group (no holding)
Energy stocks outperformed during July on the back of a 13% rally in the oil price. While our underweight position in Woodside detracted from performance, this was offset by our overweight position in Santos.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-22.pdfJune, 2023
The Fund returned negative 0.09% (after fees) for the month ending 30 June 2023, underperforming the ASX 200 Accumulation Index by 1.84%. The Fund returned 2.08% (after fees) for the quarter ending 30 June 2023, outperforming the ASX 200 Accumulation Index by 1.06%.
POSITIVE CONTRIBUTORS
AGL
AGL outperformed in June after providing FY2024 earnings guidance ~15% above consensus forecasts and clarifying future capital expenditure intentions. Of the $20 billion that AGL has earmarked for investment on the energy transition, roughly half will be on AGL’s balance sheet, and only $4 billion will be spent between now and 2030. This capex profile enables AGL to pay out 50-75% of profits as dividends, providing a strong, sustainable yield for investors.
QBE Insurance
QBE Insurance outperformed during the month. Positive sentiment was influenced by a rise in global bond yields. The most relevant bond yields for QBE’s investment portfolio are 2-year bond yields, which rose 50 basis points in the US and Australia, and nearly 100 basis points in the UK.
NEGATIVE CONTRIBUTORS
BHP (underweight)
BHP outperformed on continued speculation of further China stimulus targeted at the property sector. We are observing developments in China closely. However, we continue to believe stimulus measures will be aimed at achieving stabilisation rather than spurring a material lift in activity.
CSL
CSL shares underperformed after the company released an update on FY2023 and FY2024 earnings expectations. FY2023 guidance was moved to the top end of the previous range. However, expected profit growth of 13-18% in FY2024 fell short of market expectations. We are seeing very strong improvements in the cost of inputs for CSL’s plasma business. However, we expect this to take 9-12 months to flow through to improved margins in the P&L.
May, 2023
The Fund returned negative 0.73% (after fees) for the month ending 31 May 2023, outperforming the ASX 200 Accumulation Index by 1.80%.
POSITIVE CONTRIBUTORS
Santos
Santos shares outperformed over the month on no notable company news. The upcoming OPEC+ June meeting will be one of the group’s most anticipated meetings, given conflicting messages around production cuts from Russia’s Deputy Prime Minister and Saudi Arabia’s Energy Minister during May.
James Hardie Industries
James Hardie outperformed in May after reporting an in-line FY 2023 result and initiating 1Q 2024 profit guidance 10-15% ahead of consensus expectations. Management did not explicitly guide to full-year earnings, but outlined a number of scenarios for North America margins if volumes weaken. The market took comfort from the fact that James Hardie expects to maintain margins above 25% even if volumes fall by 20%.
NEGATIVE CONTRIBUTORS
Newcrest Mining
Newcrest shares underperformed in May. The US 10-year bond yield rose 20 basis points and the US dollar strengthened 3%, both negative for the gold price. On 15th May, Newcrest entered a binding scheme implementation deed with Newmont on previously agreed terms. The shareholder vote will be held in September or October, with scheme completion expected before the end of 2023.
Incitec Pivot
Incitec Pivot reported a 1H 2023 result below market expectations, mainly due to lower earnings from its Phosphate Hill fertiliser plant. An unexpected outage at Phosphate Hill led to lower volumes and consequently higher cost per tonne. Despite the operational miss, we remain encouraged by positive operating trends emerging in the Explosives business.
April, 2023
The Fund returned 2.92% (after fees) for the month ending 30 April 2023, outperforming the ASX 200 Accumulation Index by 1.07%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-19.pdfMarch, 2023
The Fund returned negative 0.56% (after fees) for the month ending 31 March 2023, underperforming the ASX 200 Accumulation Index by 0.40%.
For the quarter ending 31 March 2023, the Fund returned 3.71%, outperforming the ASX 200 Accumulation Index Benchmark by 0.25%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-18.pdfFebruary, 2023
The Fund returned negative 0.59% (after fees) for the month ending 28 February 2023, outperforming the ASX 200 Accumulation Index by 1.86%.
CONTRIBUTORS TO RETURNS
Positive contributors included QBE Insurance, Origin Energy and The Lottery Corporation. Negative contributors included Domino’s Pizza Enterprises, Lendlease and Lynas Rare Earths. We discuss each further in our commentary below.
POSITIVE CONTRIBUTORS
QBE Insurance
QBE Insurance outperformed in February after reporting a FY22 result that was slightly better than revised guidance provided in November. While the outlook provided for FY23 was broadly in line with consensus estimates, the stock outperformed as the market gained more confidence in QBE’s ability to continue delivering on its targets.
Origin Energy
Origin Energy outperformed during the month. After a number of delays to the due diligence process and a government cap on the gas price, the market had begun to heavily discount the chance that the $9.00 per share non-binding takeover bid from EIG and Brookfield would proceed. However, the EIG/Brookfield consortium returned in late February with only a modestly revised proposal of $8.90 per share, driving significant outperformance in the Origin share price.
NEGATIVE CONTRIBUTORS
Domino’s Pizza Enterprises
Domino’s Pizza Enterprises underperformed during February after reporting a weak 1H23 result and providing very subdued comments on the outlook. The pricing changes Domino’s has made to offset higher costs appear to have had a greater negative impact on volumes than expected, particularly for delivery customers. The withdrawal of FY23 guidance less than three months after reaffirming it with a capital raising also drew management credibility into question.
Lendlease
Lendlease reported a 1H23 result that was below market expectations but importantly reaffirmed FY23 and FY24 guidance. The stock underperformed due to increased gearing levels, with debt-to-equity now sitting above the mid-point of Lendlease’s 10-20% target range.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-17.pdfJanuary, 2023
The Fund returned 4.90% (after fees) for the month ending 31 January 2023, underperforming the ASX 200 Accumulation Index by 1.32%.
CONTRIBUTORS TO RETURNS
Positive contributors included SEEK, Lynas Rare Earths and Domino’s Pizza Enterprises. Negative contributors included Origin Energy, Santos, and Incitec Pivot. We discuss each further in our commentary below.
POSITIVE CONTRIBUTORS
SEEK
SEEK outperformed along with other consumer names during January, as expectations of a soft landing for the global economy gained momentum. The volume of new job ads on the SEEK platform continues to hold up reasonably well, tracking just 5% lower than the same time last year.
Lynas Rare Earths
Lynas Rare Earths outperformed during the month. Outperformance was driven by the reopening of the Chinese economy and a strong quarterly update. December quarter production of Lynas’ main rare earth product, NdPr, improved 44% on the September quarter as water outages in Malaysia were successfully rectified.
Domino’s Pizza Enterprises
Domino’s Pizza outperformed during the month. The stock was another beneficiary of the global rally in consumer stocks in January.
NEGATIVE CONTRIBUTORS
Origin Energy
Origin Energy shares underperformed in January. The expiry date of exclusive due diligence granted to EIG/Brookfield was extended for a second time before ultimately expiring on 24 January. All parties appear to be working towards agreement on a binding bid. However, ongoing delays have impacted the market’s perception of the likelihood and/or price.
Santos
Both the Santos share price and the USD oil price were flat in January, trailing the 6.2% performance of the ASX 200. Santos reported a largely in-line quarterly production report. Another quarter of strong cash flow reduced gearing to 18.7% as at 31 December, below the mid-point of Santos’ 15-25% target range.
December, 2022
The Fund returned negative 1.95% (after fees) for the month ending 31 December 2022, outperforming the ASX 200 Accumulation Index by 1.26%.
For the quarter ending 31 December 2022, the Fund returned 9.13%, underperforming the ASX 200 Accumulation Index by 0.27%
Positive contributors included Virgin Money UK, Newcrest Mining and QBE Insurance. Negative contributors included ResMed, Lynas Rare Earths and our underweight holding in iron ore names. We discuss each further in our commentary below.
POSITIVE CONTRIBUTORS
Virgin Money UK Virgin Money UK shares outperformed the ASX 200 and UK bank peers following a strong FY22 result. The macro environment remains supportive of net interest margins, with hawkish central bank commentary driving a 50 basis point rise in UK 10-year bond yields during December. Virgin Money UK has now outperformed the ASX 200 by 50% from its October lows.
NEGATIVE CONTRIBUTORS
ResMed ResMed shares underperformed as the healthcare sector trailed the ASX 200 modestly. During the month, ResMed’s main competitor, Philips, provided positive results from the testing it has carried out on recalled CPAP devices. However, Philips is yet to receive feedback from the FDA on the data.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-15.pdfNovember, 2022
The Fund returned 6.24% (after fees) for the month ending 30 November 2022, underperforming the ASX 200 Accumulation Index by 0.34%.
POSITIVE CONTRIBUTORS
Origin Energy Origin outperformed after receiving a non-binding indicative takeover proposal from Brookfield Asset Management and the EIG Consortium. The offer of $9.00 per share represented a 55% premium to the most recent closing price, illustrating the value in Origin’s suite of assets that are well positioned for the energy transition. Following the announcement, the Origin share price traded at a ~15% discount to the offer due to perceived risks around ACCC and other regulatory approvals.
NEGATIVE CONTRIBUTORS
Santos Santos underperformed as the oil price declined by 12% in November. While supply remains very tight, price softness was driven by concerns on the demand outlook as a result of the global slowdown and China’s continued COVID-zero policy. Speculation around a government cap on East Coast gas prices also began to build. While we see problems with the implementation and flow-on consequences of such a cap, the increased uncertainty hindered sentiment on energy stocks.
October, 2022
The Fund returned 4.76% (after fees) for the month ending 31 October 2022, underperforming the ASX 200 Accumulation Index by 1.28%.
POSITIVE CONTRIBUTORS
Santos
Santos shares outperformed in October on the back of strength in the oil price. OPEC agreed to cut production by two million barrels per day during the month in response to a weakening demand outlook. The company also reported a quarterly result which was in line with expectations, with only minor tweaks to 2022 guidance measures.
Qantas Airways
Qantas Airways shares outperformed during the month after the company released a very strong profit update. Qantas expects to report pre-tax profit of $1.2-$1.3 billion for the six months to 31 December 2022, driven by strong consumer demand which has enabled it to fully recoup higher fuel costs through prices. For context, $1.3 billion is equal to the amount of pre-tax profit Qantas earned in its last full financial year before COVID.
NEGATIVE CONTRIBUTORS
Commonwealth Bank (no holding)
The Australian major bank sector outperformed during October on the back of strong margin trends evident in reported results from Bank of Queensland and ANZ. The High Conviction Fund benefitted from its overweight position in ANZ, but nil holdings in Commonwealth Bank and Westpac detracted from returns.
Ampol
Ampol shares underperformed in the month after the company released a soft trading update for the September quarter. While results in refining, retail fuel, and the recently acquired Z Energy business were strong, elevated oil price volatility impacted profits in Ampol’s wholesale fuel division.
September, 2022
The Fund returned negative 6.55% (after fees) for the month ending 30 September 2022, underperforming the ASX 200 Accumulation Index by 0.37%. For the quarter ending 30 September 2022, the Fund returned negative 1.68% (after fees), underperforming the ASX 200 Accumulation Index by 2.07%
POSITIVE CONTRIBUTORS
ResMed
ResMed outperformed in September as management continued to guide to a gradual easing of supply chain pressures. In addition, ResMed’s main competitor, Philips, was the subject of another product recall initiated by the US Food and Drug Administration. Roughly 17 million masks manufactured by Philips were found to have magnets that did not meet FDA safety standards.
Australia and New Zealand Banking Group (ANZ)
ANZ outperformed the ASX 200 in September and was also the best performer of the major banks. There was no company specific news, however broker surveys and APRA mortgage data indicated that ANZ continues to close the gap to peers on mortgage processing turnaround times.
CSL
CSL outperformed alongside most other healthcare stocks in September. The market favoured businesses like CSL, with more defensive earnings profiles, during the month.
NEGATIVE CONTRIBUTORS
Virgin Money UK
Virgin Money UK underperformed during the month post the release of the UK Government’s mini-budget. While the budget contained positive measures to support consumers and businesses, the degree of spending sparked fears that the resultant inflation would drive more aggressive central bank tightening. In our view, Virgin Money UK’s substantial surplus capital position and conservative lending portfolio put it in a strong position to weather a period of tougher economic conditions.
Origin Energy
Increased fears of a global recession led to a selloff in oil during September. The Brent crude price fell 9% to US$88 per barrel. Origin underperformed as the cash flows from its Asia-Pacific LNG project are linked to the oil price. Origin’s Energy Markets division is also negatively leveraged to lower energy prices due to fixed price contracts for gas and renewable inputs.
Santos
Santos was also negatively impacted by the oil price decline, underperforming the market. Santos confirmed that the PNG Government has submitted an offer to acquire an additional 5% interest in PNG LNG from Santos for an asset value of US$1.4bn. Santos has until 31 December 2022 to accept the offer, which would reduce its ownership interest to 37.5%.
August, 2022
The Fund returned 1.41% for the month ending 31 August 2022, outperforming the ASX 200 Accumulation Index by 0.23%.
POSITIVE CONTRIBUTORS
Santos Santos shares outperformed despite a fall in the oil price during August. Alongside its 1H22 result, Santos confirmed it has made a final investment decision to proceed with its Alaskan oil project, Pikka. Santos has a 51% ownership interest in the project which is expected to deliver first oil by 2026 and 19% IRR at a US$60 oil price.
NEGATIVE CONTRIBUTORS
ResMed ResMed reported June quarter revenues and earnings in line with consensus, however the share price underperformed following a strong run during July. US device revenues grew 11% in the quarter and the CEO continued to guide to further sequential revenue improvement in each quarter of FY23 as supply chain pressures begin to ease.
July, 2022
The Fund returned 3.75% for the month ending 31 July 2022, underperforming the ASX 200 Accumulation Index by 2.00%.
POSITIVE CONTRIBUTORS
Megaport outperformed through the month after reporting better 4Q FY22 sales and cash flow numbers than the market feared. Monthly Recurring Revenue growth of 10% (in constant currency) highlighted that momentum in the core business remains strong as Megaport continues to work on scaling distribution through third party channels. Megaport also announced it was in the final stages of finalizing a ~$20 million revolving credit facility, alleviating any balance sheet concerns.
NEGATIVE CONTRIBUTORS
QBE underperformed as global bond yields reduced by 20-60bps. Results from UK and US peers showed reasonably strong pricing and underwriting trends, but comments on inflation pressures were more prevalent. Of particular interest were UK motor insurers which flagged significant inflation across a number of areas. QBE has minimal UK motor exposure, but broader claims inflation is the key downside risk that we are monitoring carefully. Santos underperformed in July on concerns that slowing growth would impact overall oil demand. The oil price was down 4% for the month. Santos also provided an update on production that was modestly below consensus expectations.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-10.pdfJune, 2022
The Fund returned a negative 8.39% for the month ending 30 June 2022, outperforming the ASX 200 Accumulation Index by 0.38%.For the quarter ending 30 June 2022, the Fund returned negative 12.83%, underperforming the ASX 200 Accumulation Index by 0.93%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-9.pdfMay, 2022
The Fund returned negative 3.45% for the month ending 31 May 2022, underperforming the ASX 200 Accumulation Index by 0.85%
POSITIVE CONTRIBUTORS Santos
Santos shares outperformed in May as the oil price rallied from US$100/bbl to US$117/bbl. During the month, Ministers from Saudi Arabia and Bahrain highlighted that refining bottlenecks would limit the ability of supply to meet demand even if more crude oil was pumped by producers. Restricted supply and solid demand will continue to put upward pressure on oil prices. This is positive for Santos. Lynas Rare Earths
The price of Lynas’ main rare earth mineral, NdPr, rose 11% during May. While no stock specific announcements were made during the month, the company released an exploration update in early June. The update highlighted the size and scale of Lynas’ Mt Weld deposit in WA that underpins the company’s long-term growth plans. Lynas is currently mining at a depth of ~100m below surface. The current ‘life of mine plan’ extends to 200m. Recent drilling shows that the orebody extends ~600m below this.
NEGATIVE CONTRIBUTORS
Lendlease After a strong April, Lendlease underperformed in May. This was consistent with broader weakness across value stocks during the month. In a conference presentation, Lendlease’s CEO reaffirmed cost-out targets despite the challenges posed by higher inflation.
Virgin Money UK underperformed during May. The bank reported a solid 1H22 result, upgrading its net interest margin guidance for the 5th time in two years. However, the market inferred that management’s forward guidance implies a significant step-down in margins in FY23. We believe this reasoning ignores management’s established track record of conservatism when it comes to setting margin guidance.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-8.pdfApril, 2022
The Fund returned negative 1.44% for the month ending 30 April 2022, underperforming the ASX 200 Accumulation Index by 0.59%.
QBE Insurance Group shares outperformed in April on the back of rising bond yields across all major geographies. QBE has significant leverage to short and medium-term interest rates given its substantial investments in fixed interest assets. Results from US insurers in April also indicated that margins continue to expand as price increases remain above claims inflationLendlease shares outperformed in April as value stocks outpaced growth stocks through the month. The company didn’t report any material news but did host a virtual tour of its Military Housing business which was attended by the Firetrail team.
Megaport Megaport underperformed over the month. Reported 3Q revenues grew 43% last year, however, this was modestly below market expectations. A lower step-up in monthly recurring revenue (MRR) raised some concerns around the pace of its partner channel strategy ramp-up and the extent to which this may be impacting momentum in Megaport’s core business. We continue to believe the medium-term growth opportunity for Megaport is significant and will be realized within a reasonable timeframe.
ResMed underperformed during April as it reported its 3Q result which was impacted by the global chip shortage. The inability of suppliers to fulfill contracts has hampered ResMed’s ability to meet a substantial uplift in demand resulting from a major competitor recall. ResMed remains confident of growing sales through FY23 despite limited supply chain visibility, and highlighted a 12-18 month patient backlog that will also need to be addressed in time.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-7.pdfMarch, 2022
For the month of March, the High Conviction Fund returned 4.11%, underperforming the ASX 200 Accumulation Index by 2.77%. The Fund returned 1.30% for the quarter ending 31 March 2022, underperforming the ASX 200 Accumulation Index by 0.95%., Highly concentrated with an active share of 75%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-6.pdfFebruary, 2022
The Fund returned 2.61% for the month ending 28 February 2022 outperforming the ASX200 Accumulation Index by 0.47%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-5.pdfJanuary, 2022
The Fund returned negative 5.18% for the month ending 31 January 2022, outperforming the ASX200 Accumulation index by 1.17%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-4.pdfDecember, 2021
The Fund returned 2.56% for the quarter ending 31 December 2021, outperforming the ASX200 Accumulation index by 0.46%. For the month of December, the Fund returned 1.96%, underperforming the ASX200 Accumulation index by 0.79%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-3.pdfNovember, 2021
The Fund returned negative 0.03% for the month ending 30 November 2021, outperforming the ASX200 Accumulation index by 0.51%.
File:October, 2021
The Fund returned 0.62% for the month ending 31 October 2021, outperforming the ASX200 Accumulation index by 0.72%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-2.pdfSeptember, 2021
The Fund returned 3.22% for the quarter ending 30 September 2021, outperforming the ASX200 Accumulation Index by 1.51%. For the month of September, the Fund returned -1.49% outperforming the benchmark by 0.37%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-1-3.pdfAugust, 2021
The Fund returned 4.03% for the month ending 31 August 2021, outperforming the ASX200 Accumulation index by 1.53%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-1-1.pdfJuly, 2021
The Fund returned 0.72% for the month ending July 2021, underperforming the ASX200 Accumulation index by 0.38%. Positive contributors included Lynas, ResMed and BlueScope. Negative contributors included Crown, Seek and IAG. We discuss each further in our commentary below.
POSITIVE CONTRIBUTORS:
Lynas: Lynas outperformed on the back of rising rare earths prices and a strong production report. Lynas’ 4Q commentary highlighted that demand has accelerated faster than expected on the back of green investment. The company is continuing to evaluate how it can increase production capacity further.
ResMed: ResMed outperformed materially for the second month in a row as the market continued to factor in the positive implications of a major competitor recall. 2.2m Philips devices have now been registered under the recall program, and Philips management stated it is unlikely to be able to supply any new patients for ~12 months. We believe there is a substantial medium-term market share opportunity for ResMed if it can ramp up production.
BlueScope: BlueScope upgraded EBIT guidance for the 3rd time this calendar year. The company now expects to report EBIT of $1.2bn in 2H21. This exceptional profit result, which will be almost in line with the full-year EBIT it reported in FY18 & FY19, was driven by rising steel prices and continued strong demand out of China.
NEGATIVE CONTRIBUTORS:
Crown: The Royal Commission into Crown’s Victorian casino licence concluded its public hearings in July. Final submissions from counsel assisting the commission suggested that Crown should either lose its licence or retain it under onerous conditions – we believe the latter scenario remains the most likely. The Commissioner will report his findings on October 15th.
Seek: Seek underperformed over the month as the market focussed on the sustainability of recent job ad strength. The escalating lockdown situation in Sydney and resultant closure of construction for a two-week period created some shortterm uncertainty.
IAG: IAG provided an update on its expected FY21 result. The underlying result was broadly in line with low market expectations. Redundancy costs were a surprise, but are expected to contribute positively in future years. Importantly, FY22 points to an improvement in underlying margins.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report-1.pdfJune, 2021
The Fund returned 5.01% for the quarter ending 30 June 2021, underperforming the ASX200 Accumulation Index by 3.27%. For the month of June, the Fund returned 0.33% underperforming the benchmark by 1.93%. The 2020/21 financial year was a great year for HCF clients, with the Fund returning 34.14%, outperforming the benchmark by 6.34%.
POSITIVE CONTRIBUTORS:
Resmed outperformed materially during the month. Key competitor Phillips initiated a voluntary recall for a large proportion of its installed device base on June 14. The recall of a key competitor in a three player market is a huge opportunity to take market share. Our conversations with numerous industry contacts suggest Resmed will take share in both devices and masks due to disruption and reputational damage. A good case study was the 2011 recall initiated by Cochlear. In that case, Cochlear market share remained depressed for almost ten years, showing a long term impact on market structure. The key constraint for Resmed in taking the opportunity is supply chain bottlenecks due to the global chip shortage.Megaport
Megaport rallied on the back of its investor day which provided an in-depth look at its Megaport Virtual Edge (MVE) product. The investor day highlighted the significant opportunity Megaport has if it can successfully leverage its partnerships with SD-WAN (software-defined wide area network) providers to accelerate MVE adoption.
Telstra The sale of a 49% stake in InfraCo Towers was earlier than expected and with a bigger price tag. The multiple of 28x EBITDA highlighted the value in Telstra’s tower portfolio, and indicates that further value could be realised across the remainder of InfraCo in the future. Additionally, the trend towards more rational pricing in the mobile market continued, with Vodafone lifting prices across all postpaid plans at the end of the month.
Aristocrat Revenues in Aristocrat’s 1H21 result were strong, particularly given a number of slot machines across the US remain switched off. Casinos are prioritising Aristocrat’s better performing games and allocating it a greater share of slot floors. A higher cost trajectory has been guided into 2H21 as management invests in systems, sales, and design talent to support future growth. For a more detailed exploration of Aristocrat’s performance and where Firetrail sees it heading, see here.
NEGATIVE CONTRIBUTORS: Newcrest After a 10% rise over April and May, the gold price retraced 7% in June, driving underperformance in Newcrest and other gold names. An exploration update confirmed continued expansion of high grade areas at two of Newcrest’s growth projects, Havieron (WA) and Red Chris (Canada).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Firetrail-Australian-High-Conviction-Fund-Performance-Report.pdfMay, 2021
The Fund returned 2.33% for the month ending 31 May 2021, performing in-line with the ASX200 Accumulation index.
-Revenues in Aristocrat’s 1H21 result were strong, particularly given a number of slot machines across the US remain switched off. Casinos are prioritising Aristocrat’s better performing games and allocating it a greater share of slot floors. A higher cost trajectory has been guided into 2H21 as management invests in systems, sales, and design talent to support future growth.
-Virgin Money UK reported its 1H21 result and upgraded full-year net interest margin guidance from ~156bps to ~160bps, reflecting benefits from improved mortgage pricing and substantial re-pricing of deposits. 1H costs were higher than expected, however we believe this is largely a timing issue with greater cost-out plans likely to be articulated at the FY21 result in November. Newcrest
-There was no material company specific news for Newcrest, but it benefitted from an 8% appreciation in the gold price over the month. Gold is now back to where it was at the start of 2021, ~7% below the Aug-20 p
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/202105-Firetrail-Australian-High-Conviction-Fund-Performance-Report.pdfApril, 2021
The Fund returned 2.28% for the month ending 30 April 2021, underperforming the ASX200 Accumulation index by 1.19%.
• Highly concentrated with an 80% active share • Overweight
o Re-opening trades like Qantas, Aristocrat, and the energy sector, where competitive dynamics have improved post Covid.
o Base metal and EV materials where supply will not be able to keep up with demand in the medium term.
o Housing plays like Bluescope and James Hardie who are benefitting from strong demand while taking market share in their categories.
o Non-bank financials including IAG and Medibank.
o Stock specific opportunities that cannot be categorised! Newcrest and Crown as examples
• No holding in Australian banks and iron ore where we do not see compelling opportunities.
A number of updates from retailers over April indicated that the COVID-driven boost to sales is now showing signs of rolling over. This was clearly illustrated in KGN’s 3Q - sales grew by 54% but were well below company expectations, resulting in an EBITDA decline of 24% due to inventory build and increased costs of storage and shipping
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/202104-Firetrail-Australian-High-Conviction-Fund-Performance-Report.pdfDecember, 2020
The Fund returned 2.50% for the month ending 31 December 2020, outperforming the ASX200 Accumulation index by 1.29%.
Positive contributors included Oz Minerals, Nuix and Seek. Negative contributors included Qantas, Newcrest and no exposure to iron ore stocks that rose (BHP, RIO, FMG).The team got back out on the road in early December, travelling interstate. Although as borders shut again in late December and early January, a full return to domestic travel for the Firetrail team may need to wait a bit longer. In their December trading update, Qantas announced that domestic capacity was at 68% of pre-COVID levels during the month of December.
Looking forward to the March quarter, Qantas was expecting 80%, although that will be too optimistic given the current border situation. During December, Leisure was back at pre-COVID levels, whilst Business was at around 30-40%. Until an effective vaccine is rolled out, there will be continued risk and disruption of borders opening and closing. Qantas also announced continued focus on lowering their costs by outsourcing all ground handling, saving $100m per year. Qantas are definitely taking advantage of the crisis by reducing costs and systematically changing the way they do business. It is entirely reasonable to expect that Qantas will be able to deliver record profits in the years ahead driven by a more rational domestic aviation market and a growing frequent flyer loyalty business. Cyclical stocks held up reasonably well versus the increasing global COVID cases because there is increasing evidence that people are willing to travel, be social, and get back to normal as restrictions are eased. A vaccination will be critical to easing restrictions.
PORTFOLIO CHANGES
The key new addition to the strategy included adding Nuix to the portfolio. Nuix listed in December. The team conducted significant due diligence on Nuix including multiple management meetings as well as over 15 expert calls including clients and competitors.
What do Nuix do?
Nuix specialise in transforming massive amounts of messy data—from emails, social media, communications, and other human-generated content—into searchable, contextualised information. Nuix is a B2B business with customers including legal firms, Governments, and corporations. Nuix is famous for their role in sifting through 11.5 million leaked electronic files in the Panama Papers, which lifted the lid of tax havens and shadow corporations. The end result of the investigation was an estimated recovery of $1.5 billion in back taxes and fines. The Panama Papers highlights that there is a clear trend of bad behaviour moving from the physical world to the digital setting and Nuix is one of the best ways to play that.
The business is split into four key areas:
1. Workstation – forensic level analysis of large data sets
2. Discover – eDiscovery where legal firms upload case data to a system and allow fast searching of emails and other data 3. End Point – cyber security including key stroke logging of employees and proactive threat management
4. Investigate – targeting corporates, law enforcement and private investigators who are looking to find illegal / prohibited activity. Includes image analysis.
The conclusion from our research is that Nuix has the best back end processing capability in the market and their position is difficult, if not impossible, to replicate. Nuix has 90% SaaS style revenue and very high gross margin demonstrating it is a true data and platform business. We believe the business is likely to grow the top line at around 20% for the next few years. The business is profitable and selffunding which differentiates its proposition to many hopefuls today.
On valuation, at the current price of $8.25, the stock is trading on 12x EV / Sales for the FY21 year a. The 12x compares very favourably to the below competitor set which trades between 14x-30x EV / FY21 sales b. The competitor set are global software providers c. We have also undertaken DCFs which support our valuation
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/202012-Firetrail-Australian-High-Conviction-Fund-Performance-Report.pdfticker: WHT3810AU
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asset_class: Domestic Equity
asset_category: Australia Large Blend - Core / Style Neutral
peer_benchmark: Domestic Equity - Large Cap Neutral Index
broad_market_index: ASX Index 200 Index
structure: Managed Fund
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