Covid impacts still being felt in real estate and tech: Reporting season roundup

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<p><strong>Lewis Jackson</strong>: Hello, and welcome to another edition of Morningstar's reporting season roundup. Today I'm joined by equity strategist, Gareth James, whose coverage includes technology and real estate sectors.</p> <p>Gareth, thanks for being here.</p> <p><strong>Gareth James</strong>: Hi Lewis.</p> <p><strong>Jackson</strong>: Let's start across at the sector level, what were some of the themes that you noticed coming out from your coverage universe?</p> <p><strong>James</strong>: Yeah, sure. So obviously, for most stocks, we've had this hangover of COVID in 2020, which obviously impacted earnings. So, we've got some companies, which are still having impacts from that, be it job keeper payments, or lease reductions and things like that. But that's complicated further, by the fact that we obviously went into the lockdown in Sydney around June time, which means that the results the companies reported, aren't necessarily reflective of the short-term trading environment at least. And so what we did see, is we saw a lot of companies reporting recovery in the second half of fiscal 2021. So companies like REA Group, Domain, and Carsales, you know, those platforms, which really benefited from the economy returning to normal, but you know, over the subsequent six months, they're probably going to see, a reversal of that trend, which complicates things a bit. And so lots of COVID related things going on, you know, for other companies, which are experiencing strong structural trends, such as Netwealth for example. Those companies are continuing to see those &ndash; the benefits from those trends. So Netwealth is continuing to grow very, very quickly, as it wins market share from the incumbent wealth management platforms.</p> <p><strong>Jackson</strong>: So with that COVID hangover still lingering. You know, again, looking across all those different companies, were there any unexpected surprises coming out of the report, whether to the upside or the downside?</p> <p><strong>James</strong>: Yeah, look, I think the big surprise on my list was obviously the WiseTech result, which saw a huge jump in the share price, which was possibly relating to a short squeeze. But you know, there was some real fundamentally positive news that came out with WiseTech's result which I think justified, you know, driving the share price higher also. You know, on the flip side, we saw weakness in Link and G8 Education, which are both on our best ideas list. But that weakness is kind of short term related really, you know, further weakness for Link isn't particularly surprising in the short term, it's a bit of a turnaround story there. And similar thing with G8, you know, G8's in the childcare sector. So it's obviously having to work through some very challenging issues with regards to the Coronavirus impacts. But longer term, we don't see those issues for those two companies continuing, you know, on a kind of 2, 3, 4-year timeframe.</p> <p><strong>Jackson</strong>: And before we kind of move on to Link and G8, can you just quickly walk us through what you mean, when you talk about a short squeeze happening at WiseTech. Some of the listeners will know that was associated with the GameStop saga in the United States earlier this year.</p> <p><strong>James</strong>: Yeah, that's right. So a short squeeze is when you have a lot of investors who have shorted a stock. So, the way that works is that you can go and you can borrow shares from shareholders and sell them on the market in the hope that you're going to buy them back at a lower price at a later date, because you think the share price is going to fall. Now if you're sure one thing that you're very aware of is the risk that positive news can come out and you can get caught short. So, in the case of WiseTech, I think we had lots of investors that short the stock, they thought that the stock was overvalued, the result came out and the share prices started to move up. And they decided to close out their position. So they had to buy back all of those shares that they sold. And you have this intense buying pressure in the market, which is compounded by other investors who are aware that shorts are desperately trying to buy and they help drive the price up as well. So, on the day of WiseTech's result, we saw the share price up around 50%, which is very unusual. And I think you know, part of that at least was to do with that short squeeze.</p> <p><strong>Jackson</strong>: Australian version of GameStop, then?</p> <p><strong>James</strong>: Well, a little bit. Yeah, I mean, I think GameStop is a bit different because you know, the quality of the underlying business is very different. I think, WiseTech is a much more established better business. But yeah, similar kind of thing.</p> <p><strong>Jackson</strong>: And turning to Link and G8, which you sort of referenced earlier, both Morningstar best ideas, both struggling a little bit in recent months. Why are you still so optimistic about both names?</p> <p><strong>James</strong>: Yeah, sure. So talking about Link first. Link have had the last two or three years they've had a number of challenges. And, you know, for example, superannuation legislation changed. Link is a provider of admin services to the superannuation sector, the change in legislation impacted Link. So, in the short term for a year or two, that meant that Link has had an impact to revenue. And it's a very scalable business. So that has a very large impact on profits. In the longer term, and we think that Link is well positioned to benefit from long term growth in the superannuation sector. So Link's clients are superannuation funds that are run by the likes of the AustralianSuper and Hostplus. So these are not for profit firms, and we think that those firms are going to be the winners in the long term. So Link is kind of leveraged to that trend. So we're kind of comfortable with Link longer term.</p> <p>With regards to G8 Education, so that company has obviously been impacted by lockdowns and that impacts occupancy rates at its childcare centres, there's been all sorts of changes with regards to the subsidies that childcare centres get from the federal government. And in the short term that's causing a number of pressures. But you know, longer term, we think that childcare has lots of very positive attributes, such as the rising population, and the increasing demand for childcare, which we expect to benefit G8 Education longer term. So we've remained positive on that stock as well.</p> <p><strong>Jackson</strong>: Fantastic. And looking across the tens of earnings calls you've sat in, were there any themes coming out of management, coming out of guidance? Were there any interesting questions from analysts that stood out to you over the last month?</p> <p><strong>James</strong>: Yeah. I think with regards to the technology sector, you know, it's less about the kind of the COVID issues really, because it's more about those kinds of structural trends. You know, for example, you've got the three main platforms in Australia. So, Carsales, SEEK, and REA Group, which have historically been very domestically focused, but what we're seeing now is those businesses starting to expand overseas. And that's quite an interesting theme in terms of that global expansion creates much larger markets for those businesses, which are extremely high quality businesses as well.</p> <p><strong>Jackson</strong>: Fantastic. Well, Gareth, thanks very much for your insight today.</p> <p><strong>James</strong>: Thanks, Lewis.</p>

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