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Rudi’s View: August 2020 Fits The Post-2013 Narrative

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Sep 03 2020

This story features AFTERPAY LIMITED, and other companies. For more info SHARE ANALYSIS: APT

Dear time-conscious investor: August reporting season has been a positive experience, with multiple new trends and highlights

August 2020 Fits The Post-2013 Narrative

By Rudi Filapek-Vandyck, Editor FNArena

As we leave August 2020 behind us, dominated by a domestic reporting season that on multiple levels proved better-than-feared, it is my personal observation that investors in Australia now can be clearly divided in two opposing groups:

-those who are elated and chuffed as exposure to the sharp rebound in equities has paid off in spades, or at least it has seriously mitigated the losses incurred earlier in the year;

-those who feel deeply frustrated as most of their money is not in the share market, or it is in equities that have not fully participated in the strong recovery off the late-March low.

Probably the stock that illustrates the 2020 share market narrative the best in Australia is Afterpay ((APT)), a local payments facilitator that only started life as a publicly listed company in mid-2017.

Who could ever have imagined that a little over three years later, this company is now the global leader in a newly emerging online segment of the global payment processing industry, one that now has everybody’s attention, with Afterpay’s market capitalisation rallying into the local Top20?

The Afterpay story is two-fold: on the one hand we have an increasing number of newly listed technology disruptors who start from humble beginnings but potentially have a great future ahead of them.

On the other hand, the covid-19 pandemic and global lockdowns have pushed newly emerging societal shifts and trends into acceleration, with the unexpected result there are companies and business models out there that are not just benefiting, they are thriving.

When I met up with an old mate of mine recently, who’s a mortgage broker, I was perplexed to hear many of his customers who run a café or restaurant are, post the initial scare from lockdowns, currently experiencing extreme boom-time conditions.

Lockdowns are bad news. The human instinct is to focus on the sad stories that emerge. Many cafes and restaurants in my neighbourhood are still closed, or have vacated the premises.

But those re-opening in the right place and with the right adjustments and operational costs are meeting huge pent-up demand.

Every crisis shares that same common core characteristic: the strong will become stronger.

This time around, the global pandemic has created a separate group of “lucky winners”, so to speak, and their growth potential has been turbo-charged.

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Afterpay might be among the few truly lucky ones on the ASX that are enjoying two firm, beneficial shifts driving their business and the share price, they are certainly not the only one.

In many ways, the Afterpay story is not dissimilar from NextDC’s ((NXT)), or from Xero’s ((XRO)), or from Carsales’ ((CAR)), and a number of others.

Not every sustainable growth story listed on the ASX is equally witnessing their customers’ spending going ballistic, but if they are truly carried by market leadership, a defendable moat, a commercial advantage, and they are not weighed down by too much debt, an inability to amend or cut costs, or by delusional or bad management, they will come out stronger, if they haven’t already.

Short-term threats and issues aside, beneath the surface of daily moving share prices, the dominating narrative of successful investing in the share market has not changed since 2013: it’s about finding growth, and sticking by it.

You certainly wouldn’t want to bet against it.

Goodman Group ((GMG)) just beat its own guidance, yet again, for the ninth time in succession. Nick Scali ((NCK)) has guided for 60% growth in net profit this half to December.

ARB Corp’s ((ARB)) order book is at an all-time record high.

NextDC’s quintessential dilemma is that demand growth for data centres is so strong, it may potentially run out of capacity before the next phase of expansion becomes available.

Of course, for long term investors as opposed to shorter-term momentum followers, the crucial question is the longevity of it all. Reading through analysts’ research reports in August, this is equally front of mind for those who need to put a value and a recommendation on these stocks.

Most question marks involve retailers currently shooting the lights out.

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As strong and solid as the companies above, and many more others, stood out with their financial performances in August, for plenty of others what comes naturally to the few remains too hard to accomplish or to maintain.

Shares in AMP ((AMP)) might look undervalued, and they have been for quite a while, but the company again disappointed in August, while attracting lots of media coverage for all the wrong reasons.

If ever a company on the local bourse has provided plenty of evidence that paying attention to corporate culture, and to ESG (Environmental, Social and Governance criteria) in general is not a luxury but essential, it would have to be AMP.

I also believe it is companies like AMP that are teaching your typical “value” investor some incredibly harsh lessons, causing immense frustration for much longer.

Other examples from the same basket of “simply offering too much attraction to resist”, but proving frustrating duds instead, include (in no particular order) Boral ((BLD)), Unibail-Rodamco-Westfield ((URW)), Ainsworth Game Technology ((AGI)), Bendigo and Adelaide Bank ((BEN)), Challenger ((CGF)), and yes, let’s throw Telstra ((TLS)) in the mix as well.

Let’s call a spade a spade: shares in growth companies might temporarily get a bit hot under the collar, but they are still multiple times a better investment than cheap looking stocks that cannot deliver the bare essential, which is growth.

One special mention goes out to Whitehaven Coal ((WHC)) whose share price got clobbered upon realisation that if coal prices stay at current low level for much longer, this company will receive that dreaded phone call from its lenders.

This is not to say the company is facing insolvency or the board might have to call in administrators, but a fresh equity raising (at a serious discount) will definitely become a real possibility – and that’s what the market has now quickly priced in.

Another special mention has to be made for the local aged care providers, with all of Regis Healthcare ((REG)), Estia Health ((EHE)) and Japara Healthcare ((JHC)) yet again being exposed as underfunded, low quality, struggling operators in a sector that has not necessarily seen the final piece of bad news just yet.

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As well, while share price responses throughout August have been mostly positive, see also CommSec data further below, investors better not lose sight of what has been the main story in share markets for the past few years: gains achieved by new competitors and disruptors are creating headwinds for under-fire incumbents.

Analysts at Citi, on Monday, argued the case that strong momentum for the likes of Sportsbet and BetEasy, where top line and margins are almost literally flying higher as Australian punters are moving online, stand in sharp contrast with declining revenues at Tabcorp Holdings ((TAH)).

While optimistic shareholders in Tabcorp might argue bricks and mortar venues will re-open at some point, Citi points out Sportsbet in particular is spending hard and fast to pamper these new clients in an attempt to make them stick.

Tabcorp is equally one of the larger cap stories on the ASX that has provided mostly frustration for investors who thought they were buying into an attractive, cheap looking valuation, with an attractive looking yield.

The share price remains well, well below the pre-covid level, and prior to the sell-off in February those shares had range-traded for five years!

Citi thinks Tabcorp is still only half way to a more sustainable outlook, post capital raising and that badly needed cut to the payout ratio. Current yield 2.2% on FY21 consensus forecasts.

The broker suggests the incoming CEO needs to reset the wagering business and exit gaming services in order to pull this moribund elephant back onto a sustainable growth path.

The story for all of these, and many other companies remains the same: today’s cheap looking share price can only move sustainably higher if and when the successful turnaround arrives, and that means: growth, where art thou?

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Australian bank shares, with notable exception of CommBank ((CBA)), are still circa -25% below pre-covid prices.

In similar vein as for others in that “cheap but frustrating” basket of stocks, UBS banking analysts concluded on Monday it’s best investors retain a cautious approach to the sector.

For Australian banks to shake off their current book value discount, UBS suggests the following stepping stones need to fall into place:

-we need to see ongoing reduction in virus cases, preferably with positive news about a vaccine

-economic data needs to continue to improve

-the bond market’s yield curve (difference between short term and long term bonds) needs to steepen materially

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Of course, there are many more ways for companies and business models under pressure to try to turn around that sagging, moribund momentum.

Long-time struggling telecom reseller amaysim Australia ((AYS)) is now selling its energy customers grouped together under the brand of Click Energy to equally struggling energy retailer AGL Energy ((AGL)).

And that other prime example of bad corporate culture and negative ESG scores, IOOF Holdings ((IFL)) is buying struggling MLC off under-pressure National Australia Bank ((NAB)).

August provided many more examples, both successful and unsuccessful, and investors will be hoping the buyers can get as much (lasting) benefit out of these transactions as the sellers think they do.

Companies that are still looking to sell include BHP Group ((BHP)), Downer EDI ((DOW)), Lendlease ((LLC)), and Oil Search ((OSH)).

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With August now done and dusted, FNArena will soon have its final statistics for the season ready, but one observation is easily made: this has been one of the best reporting seasons in a long, long while.

On CommSec’s data analysis, 53% of ASX200 companies that reported results saw a lift in share prices on the day of earnings release with an average gain of 0.7% and a gain of 0.8% after two days.

Big gainers include WiseTech Global ((WTC)), IDP Education ((IEL)) and Monadelphous ((MND)) while on the receiving end some of the stand-out punishments were delivered to Whitehaven Coal, Bravura Solutions ((BVS)), Nanosonics ((NAN)), and Appen ((APX)).

Despite persistent weakness towards the end of the month, mostly on macro factors including the strong Australian dollar, the local market rose an additional 2.2% over the season.

It got pretty volatile, in particular during the final week, but all in all the undercurrent remained positive.

Of course, the broader context is investors have been hit hard with dividend cuts and many share prices that have not recovered from the February-March mayhem, but companies have shown they still know how to cut costs, and hence beat market expectations.

Irrespective, investors must bear in mind August turned into a positive experience because analysts’ forecasts were too low, not because corporate Australia has been shooting the lights out.

A lack of quantitative guidance for the year ahead by companies remains a dominant feature.

On CommSec’s numbers, of all companies reporting a profit for FY20, only 48% managed to report growth, with 52% reporting a decline.

Adding all profit reports up for the season, CommSec concludes aggregate earnings were down -38% on a year ago, which in itself was not a great reporting season.

All revenues combined went up by 3.4%, but total expenses rose by 4.1% also because covid-19 required extra measurements, see for example the updates released by Coles ((COL)) and Woolworths ((WOW)).

The major pain point, of course, was in dividends.

Even though plenty of companies surprised by unexpectedly paying out a dividend, or a higher dividend, the fact remains, in aggregate, total dividends paid out by Australian companies declined by -36%.

Looking back over the six months to December 2019 (interim results), CommSec reports just over 87% of the ASX200 companies issued a dividend. But for the full year to June 2020, only 69% of companies have elected to pay a cash return to shareholders.

The average over the past 20 reporting seasons stands at 86%.

Still on CommSec data, almost 23% of companies lifted dividends; 12% held dividends steady; 53% of companies reduced dividends or didn’t pay a dividend; and 12% of companies that didn’t pay a dividend last time (in February) also didn’t pay a dividend this time.

Of those trimming dividends, 20% of all companies or 27 companies that paid a dividend last time indicated they won’t be paying a final dividend. And 47 companies (34%) paid a reduced dividend.

Of the 94 companies paying a dividend, 33% lifted dividends; 17% kept the payout steady; and 50% reduced the dividend.

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There’s plenty of ongoing uncertainty, but also plenty of ongoing support from governments and central banks, leading CommSec to predict the All Ordinaries is likely to remain in a range of 6,350-6,750 by end-2020, with the range for the ASX200 between 6,200-6,600.

Investors might also pay attention to Citi strategists who this week reported Citi’s market sentiment gauge, the Panic-Euphoria Model, has surged firmly into euphoria territory.

As a matter of fact, Citi’s reading of market sentiment hasn’t been this high since early 2001, leading the strategists to warn that, historically, this translates into a 100% probability that share markets are due for a downward correction.

As per always, the exact timing is not yet known.

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The FNArena-Vested Equities All-Weather Model Portfolio still hasn’t been enticed into buying shares in Afterpay, but the portfolio has plenty of quality and sustainable growth stocks to keep the performance up.

On my observation from running this portfolio for more than 5.5 years, the portfolio has had mostly positive experiences during each of the February and August reporting seasons, in line with the general observations described earlier.

The portfolio re-allocated some funds into quality, sustainable dividend payers post results in August, and the choice was made to add APA Group ((APA)), Charter Hall Long WALE REIT ((CLW)), and Aventus Group ((AVN)).

We also used share price weakness to add Nanosonics ((NAN)) and MNF Group ((MNF)).

All in all, the Portfolio gained 2.99% over the month, which was slightly better than the ASX200 Accumulation Index at circa 2.7%.

Year to date, since January 1st, the All-Weather Portfolio is up 2.58% whereas the ASX200 Accumulation index is still more than -7% in the negative.

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Prior previews and updates on August results:

https://www.fnarena.com/index.php/2020/08/27/rudis-view-august-reporting-favours-quality-growth/

https://www.fnarena.com/index.php/2020/08/20/rudis-view-early-signals-from-august-2020/

https://www.fnarena.com/index.php/2020/08/13/rudis-view-gold-conviction-calls-early-results/

https://www.fnarena.com/index.php/2020/08/06/rudys-view-august-2020-nothing-like-the-past/

https://www.fnarena.com/index.php/2020/07/30/rudis-view-coming-soon-the-august-reporting-season/

https://www.fnarena.com/index.php/2020/07/23/forecasts-not-valuations/

(This story was written on Monday 31st August, 2020. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
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CHARTS

AGI AGL AMP APA APT APX ARB AVN AYS BEN BHP BLD BVS CAR CBA CGF CLW COL DOW EHE GMG IEL IFL JHC LLC MND NAB NAN NCK NXT OSH REG TAH TLS URW WHC WOW WTC XRO

For more info SHARE ANALYSIS: AGI - AINSWORTH GAME TECHNOLOGY LIMITED

For more info SHARE ANALYSIS: AGL - AGL ENERGY LIMITED

For more info SHARE ANALYSIS: AMP - AMP LIMITED

For more info SHARE ANALYSIS: APA - APA GROUP

For more info SHARE ANALYSIS: APT - AFTERPAY LIMITED

For more info SHARE ANALYSIS: APX - APPEN LIMITED

For more info SHARE ANALYSIS: ARB - ARB CORPORATION LIMITED

For more info SHARE ANALYSIS: AVN - AVENTUS GROUP

For more info SHARE ANALYSIS: AYS - AMAYSIM AUSTRALIA LIMITED

For more info SHARE ANALYSIS: BEN - BENDIGO & ADELAIDE BANK LIMITED

For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED

For more info SHARE ANALYSIS: BLD - BORAL LIMITED

For more info SHARE ANALYSIS: BVS - BRAVURA SOLUTIONS LIMITED

For more info SHARE ANALYSIS: CAR - CARSALES.COM LIMITED

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: CGF - CHALLENGER LIMITED

For more info SHARE ANALYSIS: CLW - CHARTER HALL LONG WALE REIT

For more info SHARE ANALYSIS: COL - COLES GROUP LIMITED

For more info SHARE ANALYSIS: DOW - DOWNER EDI LIMITED

For more info SHARE ANALYSIS: EHE - ESTIA HEALTH LIMITED

For more info SHARE ANALYSIS: GMG - GOODMAN GROUP

For more info SHARE ANALYSIS: IEL - IDP EDUCATION LIMITED

For more info SHARE ANALYSIS: IFL - INSIGNIA FINANCIAL LIMITED

For more info SHARE ANALYSIS: JHC - JAPARA HEALTHCARE LIMITED

For more info SHARE ANALYSIS: LLC - LENDLEASE GROUP

For more info SHARE ANALYSIS: MND - MONADELPHOUS GROUP LIMITED

For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED

For more info SHARE ANALYSIS: NAN - NANOSONICS LIMITED

For more info SHARE ANALYSIS: NCK - NICK SCALI LIMITED

For more info SHARE ANALYSIS: NXT - NEXTDC LIMITED

For more info SHARE ANALYSIS: OSH - OIL SEARCH LIMITED

For more info SHARE ANALYSIS: REG - REGIS HEALTHCARE LIMITED

For more info SHARE ANALYSIS: TAH - TABCORP HOLDINGS LIMITED

For more info SHARE ANALYSIS: TLS - TELSTRA CORPORATION LIMITED

For more info SHARE ANALYSIS: URW - UNIBAIL-RODAMCO-WESTFIELD SE

For more info SHARE ANALYSIS: WHC - WHITEHAVEN COAL LIMITED

For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED

For more info SHARE ANALYSIS: WTC - WISETECH GLOBAL LIMITED

For more info SHARE ANALYSIS: XRO - XERO LIMITED