Jonas Daly:
Hello, and welcome to our podcast for September 2023. My name is Jonas Daly, head of distribution at Bennelong Funds Management, and today I'm joined here by the BAEP investment team, including Mark East, chief investment officer and founder of the firm; Neale Goldston-Morris, senior investment analyst, and also covering the economics and market strategy; and Brad Clibborn, portfolio manager and senior analyst. Gentlemen, welcome today.
Before we kick off, we'll really focus on the relative performance of our portfolios, all of which have recovered very well for the calendar year and the financial year with, for example, the Concentrated Fund up 8% for the calendar year. The ex-20 Fund is up 11% for the calendar year. So just before we kick off, really just wanted to say thank you for all your support and we'll just pass over to the team from here.
Mark East:
Thanks, Jonas. Yeah, it's obviously good to have some solid numbers, but we're not getting carried away. We've got a bit to make up for, but I would like to thank our clients who've stuck by us. We're working as hard as ever to repay that loyalty, and generate returns that we can be proud of and that our clients are happy with.
Jonas Daly:
Thanks Easty, that's great. We might just pass over, from a macro point of view plenty of things going on, Neale, so we'll just get some thoughts from you, and then we'll dig into the portfolio.
Neale Goldston-Morris:
Yeah. Quickly on the macro, so last time we talked about the outperformance from the American economy. I'm pleased to say that has continued, in fact it's strengthened. So underlying growth in the US is now close to 5%. That compares with near zero in Australia. There's a constructive environment in the US, where the consumer is de-geared, is willing to spend, and is continuing to spend. The government is working with the private sector to enable a reasonably smooth energy transition, and interest rates are at a level which is not stopping the consumer, but just edging inflation back sufficiently to reduce those interest rate risks. Australia, by contrast, is slowing a lot more. The consumer is struggling with increasing costs, particularly energy costs. Our transition is very lumpy, bumpy, high cost, et cetera, courtesy of Canberra. The wages environment is tough as well, and particularly with more regulation that's occurring.
So there's a widening gap between the two economies and hence, as we stated in the last podcast, we are very overweight to the global stories, the global stocks in the industrial space, the James Hardies, the Aristocrats, Goodmans, et cetera of this world. When we look at the reporting season, that was reflected again, so the average EPS growth of the market for the financial year '23 was zero. That sounds ordinary. Resources were down, well down, because commodity prices had come off. Property trusts were well down as well, because most of property is struggling. The standout area actually was the global industrials. Their EPS growth was around 27%. Now, that was a little bit helped by exchange rate. The Aussie dollar had come down 3 or 4% in that. There's still a very strong performance, far stronger than a single-digit result out of the domestic industrials. We believe that gap will continue to widen, because in particular, in domestic Australia we have real cost issues: inflexible wages system, more regulation there, an energy transition that is really struggling.
There are two other themes within the reporting season which are worth mentioning. First, the COVID winners versus losers. Those stocks that were COVID losers, and almost shut down during COVID, really aggressively addressed their cost profile. They re-engineered their businesses, and we're talking here with stocks like Flight Centre, Corporate Travel, et cetera, IDP. They've lowered their costs enormously, so as their industries have bounced back with the reopening, that's dropped straight through to the bottom line with strong earnings leverage. If you contrast that with a lot of the defensives that coasted through COVID thinking, well, we're all right, they didn't address their cost profiles enough, and hence on balance in this reporting season, you've had a lot of disappointing results out of the domestic defensives: stocks like Endeavour, Coles, Ramsey, Sonic Healthcare, et cetera, et cetera. We believe that the gap between the global and the domestic will continue to widen, and we're quite happy with our positions as far as that very high global industrial exposure.
Just finally, China is not as bad as the media portrays. It is struggling clearly with housing, but housing is not the economy, it's about 10%. It's mainly consumer spending, which is okay, infrastructure quite good. It's sufficient to, say, be neutral on resources, but it's not sufficient to anticipate a major performance out of the resource sector. Our exposure is still very limited to a bit of BHP, a couple of lithium stocks. We have no energy, no gold, and nothing else really in that space. We're waiting for the Chinese government to effectively address its problems. Hopefully, that will occur. We may then start to increase exposure, but watch that space as far as that is concerned.
Jonas Daly:
Thanks, Neale. I might just pass over now to Brad from a portfolio point of view. Any results that you felt went well or didn't go so well from the results season in particular?
Brad Clibborn:
Thanks, Jonas. I might touch base on Carsales, and James Hardie. They were both really positive contributors to returns for the portfolios through reporting season.
Carsales reported a really strong revenue growth of 18% EBITDA growth, and 19% on a proforma basis, and they were both 3% ahead of consensus. Compositionally, we saw double-digit revenue growth across all their key business units, so a really sort of solid set of numbers. One of the debates around Carsales over the last 12 months has been to what degree the used car market in Australia would present any sense of cyclicality, and this result really showed through that the used car market is much less cyclical than new vehicles, and we saw solid results in their Australian business. We did see some normalisation in used car prices in Australia, but the market share gains made by Carsales in the private business, their dynamic pricing they’ve put in place, and recovery in in-depth products, and the usage of those by dealers, saw this Aussie business deliver 15% revenue growth overall, so very strong results. They also provided a guidance for FY24, and we saw that drive reasonable consensus earnings upgrades as well, and consensus now looking for in the order of 15% EBITDA growth through FY24.
On the more strategic and longer-term drivers of the business, a few things we learned there. A key highlight of the result was their US business, called Trader Interactive. As a reminder, that's a business they acquired originally in 2021. They bought a minority stake, and took full ownership in 2022. It is the leading US online marketplace for non-auto, so RVs, commercial trucks, motorcycles, and equipment. The business model that Carsales is applying there is taking their expertise from their Australian marketplace, and leveraging that to drive improved monetisation in the US business, and we're seeing the evidence of that come through. Trader has leveraged Carsales IP very early on. They've released new products, they've improved yields, and expanding in media, enhancing their third-party advertiser revenues. We saw the second half of the financial year revenue growth out of Trader was up 16%, close to 20% EBITDA growth, and that's expected to continue with Carsales pointing to strong earnings growth expected out of their US operations over the next 12 months. That's been a key part of our thesis is the strong outlook, and opportunity for them in the US, and we saw that come through.
I might just cover off on James Hardie as well. That's one we've talked about a fair bit on this podcast. They delivered a very strong June quarter set of results. We saw net profit up 13% year-over-year, which was actually 15% ahead of consensus, and 6% ahead of the top end of the guidance they provided only three months prior, so a very strong set of numbers. The key driver of that really was stronger than expected volumes in the US. As we've discussed previously, the US housing market did suffer quite a sharp slowdown in the backend of calendar 2022, but has enjoyed a strong bounce through calendar 2023. The other benefit we saw for Hardie in their earnings was the strong cost discipline taken by management nine months ago saw margins in all three of their business units coming in ahead of expectations. The outlook that they provided for the September quarter was well ahead of consensus expectations as well, with earnings coming in 20% ahead of where consensus is expecting, so we've seen strong earnings upgrades across the forecast period, consensus upgraded in the order of 13%.
A few of the more strategic insights that came out of that result as well. It's very clear James Hardie is taking market share in the new construction sector. There was a clear focus of management late last year into a softening housing market to ensure that they were holding and growing share in a weaker market. They've gotten closer to customers, they've reintroduced their fighter brand called Cemplank, which has positioned them very strongly with the top 25 builders, and we're seeing the evidence of that come through. They've just signed a three and a half year exclusive contract with the US' largest home builder, D.R. Horton. We think this is making it very difficult for their key competitor, Louisiana Pacific, and really cementing Hardie's position in new construction. What that's now giving them is strong earnings position early in the cycle, where they've now indicated they'll be accelerating their rate of investment to go after gaining share in the repair and remodel segment. This is where the biggest opportunity is for Hardie in the US. This is the kind of thing we look for in our companies, where they have that discipline around growing their earnings, and reinvesting that to continue to go for further market share gains, and revenue growth. That's exactly what Hardie is doing with stronger than expected earnings that are coming through. So we continue to like the outlook for James Hardie, over the next few years. I think they're well-positioned to continue to grow in the US.
Jonas Daly:
Great. Thanks, Brad. Congratulations on a good result there. Just moving over to ARB with Mark East, and also Breville Group, just how they went in reporting season.
Mark East:
Sure. Thanks, Jonas. Yeah, the ARB result was a little below expectations, but there are a number of positives to take out of the results, and the outlook for the company which saw a strong share price reaction. Firstly, it looks like the supply of vehicles into Australia is improving. Ford, and Toyota in particular are talking about big increase in vehicle numbers over the next six to nine months, and this should flow through to increased fitment of ARB accessories. ARB in recent times has suffered from a shortage of fitters, and skilled tradespeople, but ARB appear to have made progress on this front in the recruitment side of things, and look to be in a good position to take advantage of this increased vehicle supply. The company's US operation's been impacted over the last 12 months by change in ownership of its major customer, 4 Wheel Parts, but we think the impact of this disruption should be behind ARB now.
Similar to Australia, the supply of vehicles into the UK also suffered over the previous year or two, but vehicle supply into the UK looks to be improving, and this should benefit the company's UK operation, Truckman. Another positive driver should be ARB's relationship with Ford and Toyota. This should generate more revenue over the next few years. Finally, ARB have made their first foray into the caravan segment with the launch of the Earth Camper camper trailer. There appears to be strong interest in Australia and overseas in this product, and this also could be a useful contributor to earnings over the next few years.
On Breville, Breville reported a strong result with earnings growth of around 10%, despite the challenging consumer backdrop, and the fact that they were cycling earnings growth of 16% in 2020, 21% in 2021, and 15% in 2022. A strong result was achieved despite a war and macro headwinds in Europe, and the bankruptcy of a major customer in the US. Retailer sellout of Breville products grew double-digit percentages in the US and Europe, as the company benefited from growth in coffee at home and new product releases, so the overall health of the Breville product is very strong.
Another positive out of the result was the growth from countries Breville has recently entered. Countries Breville has entered in the last three years collectively grew revenue by 96%, with Korea, which they entered a bit less than a year ago, off to a very strong start. We expect this strong growth from new countries to be an ongoing feature for Breville results over the medium term, and the company's got a long runway of new countries to enter.
Jonas Daly:
Thanks, Mark, that's great. Just as far as any softer results that came out in reporting season, anything to highlight there?
Brad Clibborn:
A couple of stocks that were a bit softer were both the travel names, Flight Centre and Corporate Travel. Both of them actually had preguided to their results in July, and Flight Centre actually upgraded their earnings in July. Both of them had quite strong share price reactions through the month of July, post those trading updates, and we saw a bit of that performance given back in August. Fundamentally, both results are in line with what they said in July. We did see some small downwards EPS revisions just on higher tax and depreciation, but the operational drivers were unchanged. The focus for those results was really about the outlook commentary, which we continue to think looks attractive for both of them.
Flight Centre continues to see strong demand from its leisure customers. They highlighted some of the segmentation of their customers, which does skew to the over 40-year-old demographic, which is the group of people that are having less pressures from the higher interest rates and higher inflation, so still have excess savings to go travelling, and a striving strong demand for their leisure business. They've also continued to win new customers in their corporate business at a very strong rate, and are expected to continue to do so in FY24.
For Corporate Travel, they reiterated their target to get to 265 million of EBITDA in FY24. That was a target they set up two years ago as part of their COVID recovery strategy. While corporate spend on travel has been slower to recover than they anticipated at the time, they've made up for that with stronger than expected client wins, so they still expect to get towards that 265 million EBITDA target. Both stocks have good growth prospects, and remain core holdings in the portfolios.
Jonas Daly:
Thanks, Brad. Well, look, that sounds like a really positive reporting season, so congratulations on your efforts there. It really shows that being true-to-label, and those quality factors are coming through into the portfolio. As Neale said, the Australian economy faces plenty of headwinds ahead of us, so offshore earners is still a focus in the portfolios. We might just wrap it up there, gents. Thanks for everything today, and thanks everyone for listening.
