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:
Realestate.com (ASX:REA)
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.
Blackmores (ASX:BKL)
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.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
INVEST WITH MONTGOMERY
Joseph Sofaer
:
Any thoughts on the recent Reliance Worldwide trading update?
Thanks!
Joseph Kim
:
Hi Joseph,
On the trading update – while the market had anticipated a potential level of softness with regards to a freeze event in the US as called out prior to their 1H19 financial result, it appears the business has experienced weaker than expected conditions in other areas due to discontinued product lines and softer construction in Australia.
It is important to note there will be an element of cyclicality with a business like Reliance, but this trading update should not change the revenue opportunity over the long-term.
Ross Grainger
:
Hi Mr Montgomery,
It is interesting that of the listed 14 Team Members there are no women
in the group. I would be interested in your comments why that might be
the case?
Kindest regards,
Roger Montgomery
:
Hi Ross,
1) There are three women in our firm. 2) We can only offer jobs to those that apply. 3) If you can find some women to apply when we are hiring, I’d be more than happy to consider them. We are agnostic as to sex.
And finally, would it more or less offensive to hire a woman on the grounds of her gender rather than on merit? Hiring a woman to ‘beef up the numbers’, so to speak, strikes me as more offensive.