After a volatile start to the year for markets, Australian Shares Fund senior analysts Alex Shevelev and Gaston Amoros say they think this reporting season will be a “particularly complicated” one.
Pandemic earnings-related pains have emerged as one particular challenge for businesses. For example, while some physical retailers such as Nick Scali (NCK) were impacted by lockdowns, some online retailers like Redbubble (RBL) were later impacted by a bout of revenge spending after lockdowns were lifted again. Cost increases have been another challenge, with businesses such as Ansell (ANN) announcing poor results to investors on the basis of increased freight and labour costs.
Interestingly, several software names have reported business as usual. But are we now at a level of valuation that makes software businesses attractive? Gaston says the dilemma this reporting season is that we’re either seeing real-economy businesses with decent valuations but poor operating performance, or tech businesses with questionable valuations but great operating performance.
Hello everybody and welcome to this week’s Forager video. My name is Alex Shevelev, Senior Analyst on the Australian Shares Fund. And joining me today is my colleague, Gaston Amoros, also Senior Analyst on the Australian Shares Fund. Hi Gaston.
So we’ve been through a very volatile January. It’s been one way traffic across many global indices, 10% falls for some. And we’re talking today about the potential upcoming reporting season volatility as well that we’re going to see from a lot of different factors. It’s particularly complicated reporting season this year. Gaston, you want to kick us off?
Sure. So I think one of the themes that we’re seeing is there’s a lot of pandemic related earnings pain out there. So particular for consumer expose names, for retailers, the ones that have a physical presence, they are suffering from the lockdowns in the earlier part of the year, so in July, September, and October. Like cases in point – Nick Scali, I think, only have half of the shops open, the trading capacity open in the Q1 of the fiscal year. So those months that we mentioned. Another one was Integral Diagnostics. They already told us that in New Zealand, which is 15% of the business, the revenue went backwards nearly 20% on the basis of all the restrictions around COVID.
And for the e-commerce players, the online retailers, what we’re seeing is, actually we’re seeing, towards the end of the half, we’re seeing a slow on e-commerce that people went out of the house and did that this episode of revenge spending, right? So after being locked down for many months, you went out to the shops and you forgot about buying things online. And that’s clearly coming out in the numbers of, the likes of Redbubble, Kogan, outdoor beauty, and a bunch of others. On top of that, we have a customer acquisition cost for the online names that are going through the roof because everyone’s trying to acquire customers online and that’s clearly have an impact on profits.
So that’s on the revenue side, but we’re actually seeing from quite a few companies cost increases as well. Now broader inflation has picked up. We’ve seen that in the general numbers, but even specific inflation around labour, around freight costs. We saw Ansell put a very poor result out to investors more recently on the basis of higher freight costs and higher labour costs, as well as their product prices coming down.
Correct. And to give people a sense of how unexpected it is, they just downgraded guidance by, I think it’s 25% or 23%, three months after they gave the number, right? So that’s answered.
Yeah. So let’s talk about something that’s probably going to be less affected by this.
Ironically, the tech names, particularly the ones that do software, they’re actually doing quite well. I mean, the problem there has been an issue of valuations – how much we pay for these businesses. But the ones that have already reported, they’re reporting business as usual, right. You’re selling software online. So there’s no problem with that – case in point, Bigtincan. They added $13 million of ARR. That’s a pace of 28% annualised growth. That’s in Q2. So that’s quite healthy and the business is trading at a fraction of what it was trading before.
Yeah. I mean, Nitro is a good example of that as well. They’ve increased recurring revenue by 41%. A lot more of that business is now recurring. And actually this all makes a little bit of sense because you’ve got software businesses that have transitioned to workers from home that are doing the job, sales people that can sell from home. There’s not physical product to be brought into stores and disrupted in that fashion. So operationally they’re doing well. But I think as you mentioned before, the question through this reporting season is, are we now at a level of valuation that makes those businesses attractive? And I think by and large, we’re coming more and more to some of the higher quality, small cap growth names that is starting to be the case.
Yeah. So ironically, the dilemma this earning season is you have either real economy business, like this evaluation, like poor operating performance, or you have tech business, questionable evaluation, great operating performance, right? It’s a bit of a dilemma.
All right. And on that, thank you very much for listening in.
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