5 companies and insight from their management
With reporting season over a month past, I thought it worthwhile to review some comments made by senior management of companies during reporting season as the noise settles down and there is a period of time to reflect on what has occurred and how things may evolve over the next 6-12 months (and longer).
These Q&A sessions help improve an analysts’ understanding of a company’s business strategy, the current operating environment (encompassing everything from macro factors to potential changes in regulation), competitive dynamics and other pertinent issues the company may face.
Here are 1-2 insights from senior management on five company presentations I attended over the February reporting season:
On new listing volumes– new listings have been softer in January (-14 per cent nationally), but the CEO believes this is not reflective of the current market given it is seasonally very weak.
Expecting a significant drop in Q4 (Jun-19 quarter) volumes due to Federal Election, as well as extended holiday season in April given timing of Anzac Day. These listings to be deferred in to DecH19.
On pricing of listings – REA do not price for 1-year outcomes. The company takes into account both market conditions and potential future actions (such as new product launches)
Reliance Worldwide (ASX:RWC)
On 1H19 build-up of inventory – John Guest had a build-up in inventory to improve service levels and delivery performance. The investment was “single-digit A$ millions” but has led to a significant improvement in metrics.
The benefits of the investment is a greater focus on improving products and sales performance of key customers, rather than inventory management.
Baby Bunting (ASX:BBN)
On the competitive landscape – 1) Amazon – BBN estimates approximately 60 per cent of Baby Bunting’s top products are not presented on Amazon; 2) Kmart and Target are more private label, while Big W is more focused on brands. BBN price matched to over 300 competitors in the half. The company does not price match Amazon, Ebay or clearance prices (which impacted gross margins in the previous corresponding period).
Barriers to entry are low to open a small store, however, it is difficult to roll out a big-box destination store format and sees a new entrant as unlikely. Cites 13 of top 14 chains failing since 2013.
On trading challenges in China (1H19 sales growth of 8 per cent, vs 18 per cent in 1Q19) and slower revenue growth outlook – CEO cited 3 key challenges being 1) continuation of change to how consumers access and purchase Blackmores products – the company has consolidated the number of significant customers in its Australian export channel (i.e. the “daigou” channel) from 8-9 down to 3 due to receivables risks, with the drop in volume not being picked up by in-country China and Australian retail; 2) higher inventory; and 3) general softening of consumer sentiment.
Costa Group (ASX:CGC)
On the crop which has the best “scale” opportunity – CEO sees citrus as the best scale opportunity, given it is a high yielding, low labour crop. Believes Costa Group can add significant value through scale and automation. CGC had 3 orchards at the time of its IPO (2015) and now have 7.
Continued strong demand for navel oranges and mandarins – cites Australia’s quality advantage, which is counter-cyclical with Southern California (another quality producing region). Australia is a preferred supplier of oranges / mandarins to Japan (over May – November season).
On Blueberry prices – prices used to range from $3-8/punnet, and now are closer to ~$2.50–5/punnet. Given the nature of the crop, CGC expects periods of high and low supply. Northern NSW has the largest area of concentration, with peak harvest season over August – December.
Costa has created a shoulder period (over April to June) which is more costly, but loyal consumers continue to buy the product at the higher end of pricing range (~$4-5/punnet).
Scale and automation helps economics and is one of CGC’s competitive advantage.
The Montgomery Funds own shares in Reliance Worldwide and the Montgomery Global Funds own shares in REA Group. This article was prepared 09 April with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.