Max Cappetta
More than 60 listed Australian companies will be holding an Annual General Meeting over the next six weeks. Operational updates provided by company management at these events is arguably more important today than it has been over the past few years.
Investors should looking for a number of factors when a company provides guidance. COVID uncertainty has materially changed the information dynamic of company guidance in 2020, which initially saw most companies withdrawing all earnings guidance as we went head first into a global pandemic lockdown. AGM season in Q4 2020 was equally quiet with a skew to the positive (more upgrades vs downgrades) because companies had been conservative and setting low or now forward expectations. Additionally, fiscal and monetary stimulus measures were dialled up and vaccine development was pointing to a more positive 2021.
One of the key issues that investors will be looking for over the coming weeks is “cost pressures” and lower than expected revenue growth. Domino’s, for example, was sold off more than 15 per cent after announcing cost pressures were increasing across their supply chain.
Investors should keep an eye out for the following company AGMs:
- Kogan (25 November): Can Kogan maintain its revenue growth (up 100 per cent since 2018) given an end to lockdowns and consumers looking to devote spending back to services? Can they maintain margins in the near term and are they seeing cost pressures which will squeeze their margins? These are critical questions when the stock is trading at 30x 2022 earnings having fallen over 50 per cent thus far in 2021
- Seek (17 November): Seek’s revenues have halved since 2019 and 2022 estimates are still 30 per cent below that level. Has Seek taken this opportunity to build a leaner and more efficient business which can deliver similar profit levels on smaller revenue? This is probably a 2023 story but we need to see what cost guidance they provide and whether there is scope for a positive revenue surprise. Seek’s share price is already factoring in a fast reversal and trades at 50 per cent higher than its pre-COVID high, which means the upside is already priced in and there could be a fall back if recovery is slower than expected.
- Wisetech (19 November): The company surprised the market with a bumper 2021 result back in August and reacted by pushing the share price up more than 75 per cent. Things obviously get more difficult now and the company needs to continue to show it can earn increasing margins for the cargo management software for every $ increase in revenue. Comments from Wisetech regarding cargo movements and volumes will also provide insights into how global supply chains are evolving as we head into 2022
- Mineral Resources (18 November): we remain confident that Australia’s iron industry remains well placed to be a supplier of choice for the global steel industry, and that steel demand will remain robust and supported by ongoing infrastructure spending, such as the US infrastructure bill passed last week. That said, the prices for many miners has weakened as the iron ore price has fallen given lower demand from Chinese steel mills. The uncertainty for these miners is not if demand will ramp up – but when. Investors also need to consider the actual delivered price for each miner’s ore as this will be different to the benchmark price.
With cost pressures likely to remain a key issues for companies and investors, companies set to benefit include:
- Ampol to benefit from an increased fuel refining margin even as consumers lament higher fuel cost
- Banks – as net interest margin earners – will welcome a rise in interest rates while home loan owners will not. The main risk for the banks is unemployment and the impact of a falling property prices. The current robust jobs market provides comfort that wage increases can offset some of the higher loan costs. Even though the RBA has said rates will remain on hold until 2023, they have conceded they will no longer artificially hold down the three-year government bond yield.
There is plenty to focus on with AGMs over the coming weeks, particularly the guidance and cost pressures in determining who will enter 2022 with momentum and where the risks and opportunities lie for investors.
By Max Cappetta, Chief Executive