Equity analysts Stella McMullen and Katerina Diamant from Ausbil Investment Management discuss the best and worst sectors from last reporting season.
Paul Sanger: Hello. I'm Paul Sanger from the Finance News Network, and today we're joined by Ausbil equity analysts Stella McMullen and Katerina Diamant. Stella specialises in covering the consumer staples, retailing, gaming, commercial services and packaging sectors, while Katerina focuses on the automotive, capital goods, agriculture, chemicals, media, online services and utility sectors.
Stella, Katerina, wrapping up on the reporting season, I'd like to explore some key themes and trends across the sectors you cover. Stella, starting with you, what was your best- and worst-performing sector under coverage, and what drove these performances?
Stella McMullen: The retail sector was a real standout for us in the last reporting season. Expectations were very low going into the results, but the consumer has proven to be more resilient. On the flip side is the packaging sector. Volume trends have been quite weak across the sector, driven by destocking and a changing consumer behaviour with the reopening of economies.
Paul Sanger: And, Katerina, I'd like to hear your perspective on the same question.
Katerina Diamant: Thank you. We think that the capital goods sector outperformed in the last reporting season. It is a very diverse sector, and it's a few drivers that contributed to this outperformance. I think, firstly, looking on a more global scale, we've seen significant growth in investment into decarbonisation projects. And in addition to this, we have seen a structural undersupply in oil and gas projects, which has led to the majors reinvesting in these type of projects. That has benefited companies such as Worley (ASX:WOR). More locally, some drivers have been strong production in commodities, as well as growth in investment in infrastructure projects, which has benefited companies such as Seven Group (ASX:SVW).
And, underperformance, I definitely think the media sector did underperform in this reporting season. It is an interest rate sensitive sector, and the consumer has been under pressure, which has led to lower advertising spend across the sector. And, for the pure-play media names, that has put downside pressure on earnings.
Paul Sanger: And, Stella, how critical will the interest rates be to your outlook, and what if rates stay higher for longer?
Stella McMullen: A reduction in interest rates will clearly be supportive of the consumer and therefore of the retail sector. Holding rates higher for longer would remove some upside risk to earnings, but for us it's a timing question whether we'll see upside come through in '25 or 2026.
Paul Sanger: And, Katerina, I'm interested to hear your perspectives on the same question.
Katerina Diamant: I think echoing Stella's comments on the consumer, I think the media sector is definitely one that is exposed to interest rates, and that does impact the consumer sentiment, which flows into advertising spend by companies, and that's been one of the expenses that was initially cut by large companies as we saw interest rates tick up. Looking forward, I don't think the market has anticipated that rate cut expectations to drive at market recovery. But, on the flip side, I think the downside is mostly priced in given we've already seen a significant decline in that sector. So, going forward, I think when we see interest rate cuts, this will be a sector that cyclically recovers, but, again, it comes with a lag.
Paul Sanger: And, lastly, could you both discuss, of the sectors you cover at Ausbil, which sectors do you see outperforming and underperforming in '24, '25, and why? And maybe we'll start with you, Stella.
Stella McMullen: As we look through 2025 and 2026, we think the retail sector can continue to outperform. We're expecting to see positive earnings revisions in 2025 to be driven initially by tax cuts, and then at some stage by rate cuts. On the flip side is the supermarkets or the staple sector. The sector has been under a lot of pressure with very weak volume trends, and we think that's unlikely to change going forward. With sales growth is slowing, I think it's going to be difficult to maintain margins, and that can put some downward pressure in earnings relative to expectations and therefore the share price.
Paul Sanger: And any particular names that are standouts for you in some of those sectors that you think maybe outperform?
Stella McMullen: We think Wesfarmers (ASX:WES) is a stock that can perform quite well in a cyclical recovery. 55 per cent of the business comes from Bunnings, which is obviously linked to the housing market. And, with lower rates, we expect the housing market to pick up, and that should drive positive earnings revisions for the Bunnings segment. Kmart is another part of the business has done quite well, and we think the market is underestimating the margins profile for the business in a cyclical recovery. With higher sales, we expect margins to expand, and that should drive positive revisions also. Lastly, Officeworks is a business that we think should benefit from the replacement cycle of computers, which will come with an embedded AI capability and therefore higher average selling prices. With higher average selling prices, we could see an uptick in sales as well as margins. So, across the portfolio, we think there are enough levers that they can pull to drive earnings growth over the next 12 to 24 months.
Paul Sanger: Thanks, Stella. And, Katerina, how about your sectors?
Katerina Diamant: I've previously spoken to the media sector that we thought underperformed in the last reporting season. We think that this trend will continue into the next 12 months on the view that timing of interest rate cuts, the potential for that to be stretched out won't see that cyclical recovery in the sector. But, on the flip side, we think a sector that will outperform over the next two years will be the agriculture sector. This is really driven by improved weather conditions. That will lead to better harvesting and better farmer profitability, and in turn have positive implications for earnings across the sector.
Paul Sanger: And you highlight agriculture has been one of the sectors you think will outperform because of improved weather conditions. Can you just maybe elaborate a bit more than that? Because there's been diverse weather all over Australia, but I'd be keen to hear your thoughts.
Katerina Diamant: Yeah, definitely. So, what we've seen across Australia is very wet conditions across the east coast, but still quite dry conditions across the west coast. But comparing this to around six months ago, when the outlook was for a drought across Australia, the weather conditions have improved materially. So that is why we think, from an earnings perspective, this sector will outperform. The name in the sector that we like is Elders (AS:ELD) — more from a diversified agriculture play. So, they are a nationally exposed agriculture company, and they are also heavily exposed to the east coast. But if you want to look more from a pure-play east-coast commodity agriculture company, we like GrainCorp (ASX:GNC) on that play as well.
Paul Sanger: Katerina, Stella, many thanks for sharing your insights today. It's been an absolute pleasure talking to you both.
Katerina Diamant: Thank you.
Stella McMullen: Thank you.
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