Rudi’s Views: August 2023 – Winners & Losers

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 13 2023

August 2023: Winners & Losers

By Rudi Filapek-Vandyck, Editor

The proverbial cavalry storming over the hill this August reporting season in Australia were the discretionary retailers led by Harvey Norman ((HVN)), JB Hi-Fi ((JBH)) Premier Investments ((PMV)), Super Retail ((SUL)), The Reject Shop ((TRS)) and a number of others.

It wasn't so much an expression of undiluted strength, more a result of analysts downgrading forecasts too deeply while consumer spending did weaken, but remained resilient overall.

This, however, hasn't changed analysts cautious stance, and the jury remains out whether resilience remains the key word for the six months ahead, or whether this process of slowing spending on the back of RBA tightening remains poised for the next leg lower.

Those who keep a close eye on the finer details point out there have been plenty of signals and indications of weakening market conditions in the early weeks of the new financial year, and not only for consumer spending locally.

Witness also the implicit profit warning issued on Monday morning by scrap collector Sims ((SGM)), good for a punishment in excess of -10% on the day.

Viewed from a different angle, the not-as-bad-as-feared August results season was effectively 'saved' by small cap companies.

Small Caps Commanding The Limelight

Out of the 390 corporate results covered in total, the FNArena Monitor put down 112 (28.7%) as a 'beat' versus 109 (27.9%) as a 'miss', with the remaining 169 (43.3%) in line with analysts expectations.

But if we limit ourselves to smaller samples, the numbers turn markedly worse.

For the 44 companies inside the ASX50, total beats number 14; higher than the 12 results in line, but below the 18 results we labeled as a 'miss'. For the ASX200, 160 companies reported and here too, total 'misses' (55) outnumbered total 'beats' (49).

Smaller companies proved better performers in the face of multiple economic challenges. This is not so much an indictment on Australia's blue chips as it is more evidence of a multilayered, bifurcated world in which one sector is finally recovering from covid doldrums while another is feeling the squeeze from higher interest rates and changing spending patterns.

It just so happens that some of the segments facing more tailwinds than headwinds in Australia are populated by smaller sized companies.

One such sector are the contractors and engineering companies servicing mining projects and the energy transition. The largest two representatives on the ASX are Seven Group Holdings ((SVW)) and Worley ((WOR)) with market caps of respectively $10.3bn and $8.9bn, but the numbers shrink pretty quickly thereafter (Seven Group is not a pure-play either).

Pure-plays Monadelphous ((MND)) and NRW Holdings ((NWH)) only have market caps of $1.3bn and $1.1bn respectively and they are seen by many as leaders in a sector that comprises of a few dozen smaller peers. Downer EDI ((DOW)) is larger, but diversified, and reducing its specific exposure to this segment that can be extremely cyclical over time. Mineral Resources ((MIN)) provides services for third party miners as well.

The August season just ended has provided analysts and investors with plenty of clues and indications of better times ahead for this sector, at least in FY24 and potentially FY25 too. A post-August sector update by UBS highlights the strong positive EPS growth profile that seems on offer compared with the overall dismal looking -6.6% for the ASX200 in general.

The sector generally is still battling higher costs and difficulties with finding skilled personnel, but an uptick in capex by miners and energy companies should outweigh the risks and negatives, so the narrative goes. UBS's top picks for the year ahead are Worley, Seven Group, and Imdex ((IMD)).

Plenty of others received positive responses and commentary in August, including Austin Engineering ((ANG)), Chrysos Corp ((C79)), Emeco Holdings ((EHL)), Macmahon Holdings ((MAH)), Monadelphous, and Mitchell Services ((MSV)).

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