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Three more winners, and a loser, from reporting season

28082020_3 winners, 1 loser

Three more winners, and a loser, from reporting season

Reporting season has delivered few surprises. This was again borne out by the results announcements from Woolworths, Reece, Flight Centre, and Afterpay, which are all exposed to consumer spending. No prizes for guessing which ones delivered strong results, and which one did not.

Companies winning from changes in behaviour as a consequence of stay-at-home restrictions have provided outlook statements reflecting the fact they continue to win while those restrictions remain in force. Those same winners have also become even more expensive as reflected by the expansion of PEs for those companies already with the highest PEs.

The latest companies to report, which we briefly highlight here, are a mixed bag of  consumer companies including a consumer staple (Woolworths), a company exposed to renovation demand (Reece), a travel agent whose shares could seriously fly when leisure travel resumes (Flight Centre) and the leader in the relatively nascent Buy Now Pay Later sector (Afterpay).

Most sell-side analysts remain of the view that a tapering of government largesse, including JobKeeper, JobSeeker and early access to superannuation will produce a serious tapering of expenditure. This assumption makes sense but the extent of the decline in spending may itself be mitigated by the redirection of cash normally spent on overseas travel and on domestic entertainment options which are all currently banned or restricted. Given the poor state of the economy, we also believe further stimulus is likely to be announced at the October Federal Budget. No political party wants to see conditions worsen due to their own inaction or lack of sympathy for the plight of their constituents.

Investors should keep an eye on weekly ABS payroll data, Westpac Consumer and NAB business surveys, and Google mobility data, which all recovered strongly in May and June but have since flatlined and begun to decline, partly thanks to the second COVID-19 wave in Victoria. Credit growth is also slowing with credit card and mortgage data reflecting a predilection for debt repayment.

Reece (ASX:REH)

Reece reported revenue up 10 per cent to $6 billion and underlying/normalised EBITDA up 24 per cent to $650 million. Reported NPAT excluding the impact of AASB16 lease accounting rose 19 per cent to $240 million.

The acquisition of US based plumbing supply wholesaler, Todd Pipe, in October 2019 and a lower Australian dollar contributed to US EBITDA up 16 per cent. Closer to home, Australia and NZ EBITDA fell three per cent. Reece benefitted from most of its stores and distribution centres remaining open during lockdowns here and in the US, but of course not in NZ during March when stage four lockdown conditions were implemented.

Reece’s operating cash flow jumped to $601 million from $255 million thanks to an improvement in working capital and the aforementioned jump in EBITDA.

Cash jumped from $127 million to a war chest of over $1 billion. This was at least partly funded by the $640 million capital raising and a $600 million increase in long term debt, $200 million of which went to the acquisition of intangibles.

The capital raising has meant the company revealed a significant halving in net debt to EBITDA. Reece also surprised investors, reporting dividends of 12 cents per share versus expectations of eight cents. This is despite the fact that the pipeline for residential construction is narrowing as the recession lengthens.

As was widely anticipated, the company did not provide any guidance.

Flight Centre (ASX:FLT)

Flight Centre is in hibernation mode and provided guidance two weeks ago (August 13) so expectations were just about in line with the result. We note cashflow however was positive albeit only just under $6 million (was $279 million in FY19).

Underlying profit before tax swung from a profit of $343.1 million in 2019 to a loss of $510 million. With $340 million of mostly non-cash one-offs, the statutory loss was $849 million.  Prior to the travel restrictions imposed in March, FLT recorded a profit before tax of near $150 million for the eight months to Feb 29, 2020.

The better than expected cash flow included government subsidies of A$98 million and lease accounting benefits.

The market knows all the bad news at the operating level – everyone can see that – so more interrogation of the balance sheet (survivability/capital raisings etc.) is occurring.

Monthly cash burn is in the vicinity of $50-$55 million per month before JobKeeper. While an extraordinary amount of money, it is less than the company’s target of $65 million per month. The “liquidity runway” has been assisted by the aforementioned lower than expected cash burn and by the $900 million raised in April ($700 million capital raising and $200 million increase in debt facilities), the near $200 million raised in July through the sale of the Melbourne head office for $62.15 million and a GBP65 million government-backed UK loan. The company will also receive a net one-month runway extension (at current burn rates) from a $40-$50 million net benefit expected from the JobKeeper wage subsidy extension. With $1.8 billion in the bank at June 30 (and taking into account a $350 million cash liquidity covenant), it appears the company can survive for two years but would need to come to market for additional cash in  around a year and a half if current conditions persist.

Clearly, a vaccine announcement would be a huge positive for the company’s shares.

As expected, no final dividend was declared, and no guidance was offered.

Woolworths (ASX:WOW)

FY20 result was approximately in line with expectations.

Revenue was up 8.1 per cent to $63.6 billion. While all the media headlines will focus on the 21.8 per cent fall in net profit from continuing operations of $1.16 billion, investors should note that $600 million of one-off costs were incurred. These were related to additional cleaning, security and pop-up distributions centres, and include $176 million in one off costs associated with laying off 1,350 employees in NSW distribution centres and $230 million in costs associated with the ongoing demerger of Endeavour Drinks.

Importantly, sales growth in the first eight weeks of FY21 has been strong across all divisions with the exception of the Hotels business.

Online supermarket sales is currently the fastest-growing segment, up 40 per cent to $2 billion in FY20. With Christmas approaching, strong growth rates are expected to continue.

The Australian food business recorded stronger sales but lower EBIT due to higher than expected CODB (Cost of Doing Business). We think this is likely due to some of the one-off cost one would normally allocate to corporate overheads being allocated this division.

Big W sales and EBIT was better than expected on better fixed cost leverage and strong online growth (+118 per cent in 4Q20) and overall LFL (like-for-like) sales growth of +31.8 per cent in 4Q20.

Cash flow was strong resulting in lower than expected net debt at period end. This is despite net capex being higher than expected. Closing wasn’t abnormally low, but payables appears to be elevated. This is primarily due to timing of payments, so it is likely to reverse in FY21.

Not a lot on the outlook. WOW comments that 80 of its hotels and the five managed clubs remain closed (out of 334 hotels).

Afterpay (ASX:APT)

Despite the apocalypse occurring in retailing, Afterpay says it is helping consumers budget and helping merchants win new business. Afterpay’s management noted the company is “a net beneficiary of the significant shift to online spending and the shift away from traditional forms of credit.

The company added an average 17,300 new customers per day in the 2020 financial year.  In the fourth quarter of the financial year it added 20,500 new customers per day.

It still made a loss. Afterpay reported underlying sales growth of 112 per cent to $11.1 billion and EBITDA growth of 73 per cent to $44 million but these had been pre-announced and so were expected.

The company’s FY20 NPAT loss was $22.9 million, which was greater than consensus estimates for a loss of $18 million.

This financial year the company will expand into Canada and Asia and the company called out a higher investment spend in FY21 (read more losses).

Management remain necessarily upbeat noting a strong pipeline of US merchants waiting to be onboarded.

The company has $1.3 billion of cash and $2 billion of liquidity, which of course it simultaneously needs and will expand as it grows.

In terms of outlook, the company has previously said it is targeting $22 billion of GMV (gross online merchandise value) and greater than two per cent margins (not unlike any other factoring company) by FY22. We note AUSTRAC is still considering the independent auditors report and ASIC will publish its review into Buy Now Pay Later operators including Afterpay in September this year.

Woolworths, Reece, Flight Centre, and Afterpay, which are all exposed to consumer spending recently reported. Three of them had a good result, here's a run down. Click To Tweet

The Montgomery Funds own shares in Woolworths and Reece. This article was prepared 28 August 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.


Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

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.

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