by Rhett Kessler, CIO and Senior Fund Manager
Having just come out of reporting season, one of the main observations that stood out was the unusually high level of noise. This was undoubtedly one of the side effects of covid, but instead of dismissing it, Pengana Capital’s Australian Equities Fund took the opportunity to learn from these unique events.
We found that the business momentum was vastly different in the first three-quarters of FY20, compared to the last, and that companies with digital value propositions accelerated and did well in the last quarter. On the other side of the spectrum, there was a whole host of companies that collapsed in the lockdown due to the negative impact it had on their businesses, particularly in industries such as travel, hospitality and events.
Here are the five trends that emerged from the reporting season this year.
- No guidance. One of the main reasons investors look at earnings releases or earning results is to see if they can use them as a base for predicting the future. Unfortunately, this reporting period did not garner such useful information, as most company management teams withdrew their guidance. Certain companies inform their fund’s manager on what they might do, which can be a luxury, as it is really their job to predict and work it out themselves.
- Downsides to government aids. Since the start of the pandemic, there has been no doubt that government stimulus packages such as JobKeeper and JobSeeker were an enormous help. There were also huge cash flow benefits where governments provided plenty of liquidity by allowing companies to pay their tax at a later date, while also accelerating their own payments into the system. From our findings, these cash flow benefits are likely to prove to be unsustainable.
- Fears of geopolitical risk. There has been increasing concerns in the industry about escalating geopolitical risk. Apart from the political landscapes of China or the US, there is the impact of COVID in certain societies, where there is an already magnified difference between the haves and the have nots. The US is a clear example of one of those areas but there are places where the difference has been further exaggerated such as South Africa, India, Indonesia, and Brazil.
- From up to down. In this industry, things can turn almost 180 degrees in a very short period. There has been an instance where the market not only corrected with a big interruption in business momentum, but it bounced back enormously. To some extent, the industry is now trading above fair value, as there is a lot of exuberance around. All in all, there have been years when nothing has happened and then there have been days or months with a year’s worth of events. Certainly, the latter is what has happened recently and there is still a learning curve ahead of us all on how to navigate through this.
- Changes in consumer behaviour. The impact of lockdowns on consumer and business behaviour was enormous and will have long-lasting effects. With everyone having to stay home, e-commerce sales have gained traction not only in retail but also in necessities such as groceries. However, we have seen some reversion of online shopping in Western Australia and South Australia where life has almost returned to normal – online sales behaviours have not stuck.
Despite a noise-filled reporting season, our investment team decided not to waste a crisis but to see what can be learnt about who has the power in every stakeholder relationship. Look at omnichannel retailers, they can sell goods online as well as in a physical store. The power they have against their landlords is certainly more powerful than if they were to just have a pure brick-and-mortar plan. For instance, JB Hi-Fi operates within the retail environment through a store as well as online, which meant they were able to negotiate incredible outcomes with their landlords.
