Cause for optimism at a2 Milk and Invocare: Reporting season roundup

--  |   28/09/2021 Text size  Decrease  Increase   |  
email_fwd
<p><strong>Lewis Jackson</strong>: Hello and welcome to another edition of Morningstar's reporting season wrap. Today I'm joined by Angus Hewitt, who oversees a series of companies ranging from a2 Milk to Qantas.</p> <p>Angus, thanks for joining us.</p> <p><strong>Angus Hewitt</strong>: Thanks Lewis.</p> <p><strong>Jackson</strong>: So, looking across the coverage universe this reporting season, were there any unexpected surprises, whether to the upside or the downside?</p> <p><strong>Hewitt</strong>: I got a lot of good disclosure this earnings season. So there weren't a lot of surprises from an earnings point of view. But there were a few things that were a little bit interesting when you really started to dig into the results. So on the upside, you've got InvoCare funeral provider, InvoCare, this is one of our best ideas. We really like this company. It's one of few companies in Australia we assign a wide economic moat, and that's underpinned by its series of premium brands in Australia highly respected, well known brands and its cost advantages over a long tail of smaller competitors in what is a highly fragmented funeral market. We already have a pretty good idea of how the pandemic is weighing on InvoCare. That's both on volume and price.</p> <p>On the volume side deaths in Australia are down. Our handling of the pandemic, lockdowns, restrictions, social distancing, people just washing their hands has led to a virtually non-existent flu season in 2020. And it looks like we're going to have essentially no flu season in 2021 as well. Compounding that you've got on the pricing side when there's restrictions on funeral attendance, InvoCare aren't able to offer their full range of services. So demand for premium services, higher cost, higher margin services, like White Lady have declined in favour of lower cost services with streaming capabilities. So what I sort of found surprising, and to the upside it was good to see how quickly pricing bounced back in periods where restrictions on funeral attendance eased. So that sort of you saw demand for White Lady really bounce back once they were allowed to have funerals with more than 10 people today. And that really indicates the strength of the underlying brands for InvoCare.</p> <p><strong>Jackson</strong>: So, less deaths is good for everyone, but InvoCare.</p> <p><strong>Hewitt</strong>: Something like that.</p> <p><strong>Jackson</strong>: And were there any other names, that surprised in the other direction?</p> <p><strong>Hewitt</strong>: None that come to mind, no.</p> <p><strong>Jackson</strong>: Okay. Now turning to a2 Milk. It's a Morningstar best idea. It's been struggling for little bit and earnings were down 70% when it reported last month. Talk us through why you're still optimistic about it.</p> <p><strong>Hewitt</strong>: Yeah, a2 has been having a rough time, earnings like you said down more than 70%. It wasn't unexpected, we did have a lot of disclosure like I was saying before that this was coming. I will just note, a2 is a &ndash; lot of the visibility of a2 in Australia is the fresh milk business. Whereas this is a much smaller part of this company a2 primarily can be viewed as a Chinese infant formula business. The majority the vast majority of its earnings are from sales of infant formula sold directly or indirectly to China. The main concern at the moment is the inventory levels in the English label infant formula, which is being sold through to China. So these high inventory levels has led to lower restocking from the key corporate daigou partners, and also an ageing of the inventory in those channels.</p> <p><strong>Jackson</strong>: And Angus just quickly when you say daigou, you mean?</p> <p><strong>Hewitt</strong>: These are reseller channels selling through to China. So they're buying the English label products here in Australia but they're eventually getting shipped off to China. Yeah. So that's the near-term, the real near-term headwind is these inventory levels. A2 has written off $109 million worth of inventory over the period. And they chose to write this off rather than discount to protect their brand. And this is a good move we assign InvoCare, not InvoCare, we assign a2 a narrow economic moat and this is based on its brand, the strength of its brand in China. A2 is first and foremost a brand business. And we still think it has plenty of brand equity in China. If you look at the Chinese label business, which it sells through what are known as mother and baby stores. The market share in these mother and baby stores at June 2021 is 2.5% versus just 2% a year ago, so they're still growing share. But to get to your question, we're still optimistic on a2. We think this is an opportunity to be greedy when others are fearful. There's a lot of pessimism baked into a2 share price. And we think inventory levels have stabilised and we're expecting continued growth in the China label infant formula business.</p> <p><strong>Jackson</strong>: And with so much importance on the China label side of the business, are you concerned with, the recent tension around China trade tensions and long term the viability of a business so reliant on the Chinese market?</p> <p><strong>Hewitt</strong>: Yeah, it's definitely a concern. A2, I'd like to point out that they are a New Zealand business, not an Australian business. It's definitely something to think of, but foreign owned formula businesses really dominate the premium side of the market in China. So we're not expecting it to weigh on sales in the near term.</p> <p><strong>Jackson</strong>: So, keeping our focus sort of international for a minute. Vaccination rates are increasing, the prospect of international travel is back on the agenda, finally. What does all this mean for Qantas? And is it too late for investors to get in on the action?</p> <p><strong>Hewitt</strong>: Yeah, the situation facing Qantas it probably doesn't need a lot of introduction. So the pandemic has obviously devastated flying across the globe and Australia's decision to close international borders for the last 18 months or so, means that the recovery in Australia significantly trails that of most of the world. This is offset a little bit by the Qantas' highly profitable domestic business when they're allowed to fly. So you've got outbreaks and lockdowns, particularly in Sydney and Melbourne at the moment. And state border restrictions in general is sort of weighing on the near term for Qantas and we're expecting the near term will remain bleak. But and we're expecting fiscal 2022, to be another full year loss as well. But we do expect these to be short term issues. The recovery of air travel will prove highly volatile. We're expecting international travel to return to pre-COVID 2019 levels by 2024.</p> <p>So there's a fair bit of recovery baked in over the next few years. And Qantas has plenty of financial headroom in the near term to get through a lot of that near term turbulence, and we think it's well positioned to really thrive when the skies reopen. As far as pricing is concerned, shares are trading at around our fair value estimate. There is valuation upside if the vaccination rollout, like you said or pent up demand leads to a quicker than expected recovery in international flying.</p> <p><strong>Jackson</strong>: And was there any optimism in Qantas' guidance when it reported last month?</p> <p><strong>Hewitt</strong>: No, there's a lot of uncertainty, there's a little bit of optimism, that they're expecting, they're tying their expectations for international borders to open with vaccination rollout. So if that's late December, is the current estimate, but I'm not expecting all international borders will suddenly reopen and we'll just go back to where we were, it's going to be more gradual. Maybe it'll just be for certain countries and maybe it'll just be for vaccinated travellers, there's a lot to be seen on how this is going to play out. Obviously, Qantas want international flying to return as soon as possible and they want internal state border restrictions to be a thing of the past. But there's still a bit of headwind to get through at the moment.</p> <p><strong>Jackson</strong>: Don't we all. Angus turning to again, back to the reporting season as a whole you know, you listen to 10s, 10s and 10s of earnings calls last month, was there anything that stood out were there any themes or any interesting questions from analysts, any comments from management that you'd like to draw our attention to?</p> <p><strong>Hewitt</strong>: Yeah. What I guess what surprised me was how much Treasury Wine likes to name drop Snoop Dogg. Snoop is a brand ambassador for one of their premium wines in the U.S. But what really stood out to me was the the Crown earnings call. For an earnings call there wasn't a lot of focus on earnings. Crown are facing two simultaneous Royal Commissions in Victoria and Western Australia. And a long drawn out process to prove suitability to operate in New South Wales and that really overshadowed both the results and the call as well.</p> <p><strong>Jackson</strong>: When it comes to your Crown valuation. Crown is currently undervalued and so it's the buy opportunity.</p> <p><strong>Hewitt</strong>: Yeah, it is. We think all this uncertainty, all this regulatory uncertainty creates buying opportunities. So there's risk. There's risk in investing, of course. But we think Crown will continue to operate in Victoria and Western Australia, and we think will eventually prove suitability in New South Wales and that's underpinned our undervalued rating.</p> <p><strong>Jackson</strong>: Fantastic. Okay. Well Angus, thank you so much for your insights today.</p> <p><strong>Hewitt</strong>: Thanks Lewis.</p>

Video Archive...

ESG funds don't underperform - but nor do they outperform
15/10/2021  The ESG outperformance narrative is flawed, new research shows.
Building investment portfolios in a low interest rate environment
06/10/2021  Investors may need to hold more growth assets over the coming years, says Morningstar's Jody Fitzgerald.
Covid impacts still being felt in real estate and tech: Reporting season roundup
01/10/2021  And how G8 Education and Link Administration are positioned for long-term success.
Look to Credit Corp for a leading indicator of economic health: Reporting season roundup
30/09/2021  What Reporting Season August 2021 told investors about the health of the financials sector.
Cause for optimism at a2 Milk and Invocare: Reporting season roundup
28/09/2021  a2 milk is an opportunity to be greedy when others are fearful.
Post-covid normalisation is underway in healthcare: Reporting season roundup
23/09/2021  Covid's winners and losers are returning to their prior trajectories. 
One of the most underappreciated dangers of investing
21/09/2021  Sequence-of-returns risk matters for both retirees and savers. Here's why. 
REITs recover pandemic losses: Reporting season roundup
20/09/2021  Analysts expect the sector to recover to pre-Covid trading levels once borders reopen.
Australian banks face margin pressure amid low rates: Reporting season roundup
15/09/2021  Rising customer deposits and access to cheap funding helped Australia's banks stave off net interest margin pressure, but analysts see warning signs.
Greenwashing explained
14/09/2021  Morningstar's Hortense Bioy on how to spot greenwashing and how to avoid it.
Earnings down as private money circles infrastructure: Reporting season roundup
13/09/2021  Utilities and infrastructure names battle the impact of covid as private equity and pension funds circle. 
Frenzy of mergers in energy: Reporting season roundup
10/09/2021  Hydrocarbons poised for a comeback.
TPG tipped to recover as mobile competition eases: Reporting season roundup
09/09/2021  Providers have lifted prices after years of a debilitating chase for subscribers at all costs , says Morningstar's Brian Han.
Short-sellers bet against ARK Innovation ETF
08/09/2021  What shorting ETFs means for long-term investors.
Surging lumber prices were no match for Brambles: Reporting season roundup
07/09/2021  Morningstar senior analyst Grant Slade says Brambles secular growth trend is intact despite nearterm headwinds. He discusses results from the building and construction materials sector.
Miners soar thanks to iron ore: Reporting season roundup
03/09/2021  Miners bask in the glow of iron ore prices while bargains remain in coal.
BHP-Woodside merger is mutually beneficial
23/08/2021  Post-merger Woodside would be well positioned to deliver on the value we've seen for a long time, say Morningstar analysts.
Investors are getting serious about sustainability
16/08/2021  But the sector lacks uniformity, says Morningstar's Christopher Franz. 
Long term outlook for AGL is positive
11/08/2021  Higher wholesale electricity prices bode well for AGL, according to Morningstar senior equities analyst Adrian Atkins.
How you can hedge your portfolio against inflation
11/08/2021  Morningstar FundInvestor editor Russ Kinnel describes some direct and indirect hedges for inflation protection.
The iron ore party can't last: Morningstar
10/08/2021  Copper and iron ore have benefited materially from China’s stimulus and the developed world recovery. But Morningstar analyst Mat Hodge see these benefit as transitory.
What the Afterpay acquisition means for investors: Morningstar Minute
05/08/2021  We believe the transaction has a high chance of succeeding.
Cannabis' federal legal status is not a total buzzkill
03/08/2021  The industry still has significant growth potential.
Stock of the week: Toyota
03/08/2021  Is one of the biggest sponsors of the Olympics positioned for an all-electric future?
2 listed microcap names to consider
23/07/2021  Morningstar's Lex Hall talks micro-cap stock picks with Carlos Gil, chief investment officer at Microequities Asset Management.
Big returns, big risks: Making money with microcaps
22/07/2021  Mornngstar's Lex Hall catches up with Carlos Gil, chief investment officer at Microequities Asset Management.
3 small-caps with Dawn Kanelleas
21/07/2021  The head of Australian small and mid-cap stocks at First Sentier Investors has her eye on ARB, Breville and IDP Education.
Forecast 2021–2022: A correction could be around the corner
20/07/2021  The strong performances of global stock markets in 2020–21 are unlikely to be repeated in the coming year says Morningstar's Peter Warnes.
'Overvalued' warnings grow as ASX 200 hits new high
12/07/2021  Morningstar equity analysts warn that equities remain overvalued despite Australia's strong economic recovery.
What to know about private equity
08/07/2021  Private equity is an exciting area for investors, with lots of hotly-tipped stocks. But there are risks to be aware of, says Pitchbook analyst Dylan Cox.
Lazard's 3 top picks for the global covid recovery
08/07/2021  Warryn Robertson is looking at French infrastructure, retail pharmacy and tax services.
Aussie banks $34bn surplus points to more shareholder dividends, buybacks
06/07/2021  Australia's largest banks have excess capital because they cut dividends, were more conservative on lending, divested assets and raised equity last year. Morningstar's Nathan Zaia thinks most of it should be returned to shareholders.
Weighing up the PEXA IPO
02/07/2021  PEXA burst onto the ASX this week in the biggest float since 2019. Morningstar's Gareth James gives his take on the company's future growth prospects.
Can the iron ore price keep rising?
30/06/2021  Iron ore prices have  been on a tear, boosting the profits of Australia's top miners.  How did we get here and is the only way up? Lex Hall sits down with Morningstar's Mat Hodge.
2 new stocks to watch
28/06/2021  Morningstar has recently initiated coverage of a food delivery app and a consumer finance product. 
'Strongest earnings season I've ever seen'
24/06/2021  Meeting the deluge of demand is the biggest task for US companies, says Bell Asset Management's Ned Bell.
Biotech beyond covid
22/06/2021  Are there still opportunities in the biotech sector now the covid-19 vaccine roll out is underway? We ask International Biotechnology Trust manager Ailsa Craig
Alibaba is still deeply undervalued
21/06/2021  Morningstar's director of Asia equity research is confident the e-commerce giant will bounce back.
Weighing up the Endeavour IPO
18/06/2021  A wide moat and attractive dividend potential are among the key takeaways of Woolworth's decision to demerge from the liquor and hospitality group.
'Then we got hit with the equivalent of a war'
15/06/2021  Lazard Asset Management's Warryn Robertson explains how companies in the Global Equity Franchise fund have adjusted to covid, and assesses the threat of rising inflation.
Understanding Magellan's active ETF strategy
11/06/2021  Magellan's Craig Wright tells Emma Rapaport why it is leading the charge in the active ETF arena and how its global equity product works.
3 off-the-radar small caps
10/06/2021  Callum Burns of ICE Investors explains his conviction in pharmaceutical distributor Ebos, PSC Insurance Group, and elite sports analytics provider Catapult.
Small cap gems and how to find them
09/06/2021  Callum Burns explains how ICE Investors identifies companies with original products and sticky customer bases.
Stock of the Week: Salesforce.com
08/06/2021  They’re building an empire.
3 oil stocks we still like
07/06/2021  A year ago the oil price went negative. How have oil giants handled the past 12 months and what's the outlook from here? Morningstar analyst Allen Good explains.
Considering crypto? Here's what to think about
04/06/2021  As the investment world goes crazy for crypto, Morningstar Investment Management's Dan Kemp explains what to consider before putting it in your portfolio
Why we like Wizz Air
03/06/2021  The airline sector is set to recover as international travel resumes. Morningstar analysts think Wizz Air offer the best opportunity among low-cost carriers.
3 global infrastructure picks
28/05/2021  4D Infrastructure's Sarah Shaw outlines the investment case for Spanish multinationals Cellnex, and Iberdrola, and the potential of Mexican airports.
Are crypto ETFs coming?
28/05/2021  The SEC continues to sort out its regulatory concerns.
Stock of the Week: Apple
27/05/2021  We’re raising our fair value as sales hit new highs—but investors need to put it in perspective, says Andrew Willis.
Opportunities in global infrastructure
25/05/2021  Covid-19 has enhanced rather than impeded the future for global infrastructure, says Sarah Shaw of 4D Infrastructure.
Tribeca's eye for Domain
24/05/2021  Tribeca's Jun Bei Liu also explains why she sees opportunity in sleep apnea specialist ResMed as well as Treasury Wine Estates.
Stocks for emerging markets
19/05/2021  American Century Investment's Patricia Ribeiro sees growth in Chinese battery technology, biologics, and building materials in Latin America.
2 stocks for the rise of the robots
18/05/2021  Robotics is a fast-growing area of tech, creating opportunities in medical, logistics and life sciences sectors and much more.
Square: Stock of the week
18/05/2021  Square's Bitcoin purchase is more marketing than operations
Tesla: Stock of the week
10/05/2021  If Elon Musk ends up delivering, we might need to raise our fair value to US$1500 a share.
Why Tribeca's so upbeat on stocks
07/05/2021  Banks and resources are poised to deliver dividends, and Treasury Wine Estates and BNPL are worth a look, says Jun Bei Liu of Tribeca's Alpha Plus long/short fund.
Looking for value in emerging markets
05/05/2021  Digital banking, ecommerce and 5G are among the key trends set for rapid growth, says Patricia Ribeiro of American Century Investments.
Cash slashed, Aussie equities up: Why Morningstar updates Model ETF portfolios
04/05/2021  Analysts have made changes to the fixed interest, property, cash and equity allocations of Morningstar's Model ETF Portfolios to take advantage of the current market environment. They've also refreshed some of the funds in the portfolio.
Investing basics: Explaining the disconnect between the stock market and the economy
30/04/2021  The stock market and the economy are not the same. Here's why.
Why deforestation matters for investors
23/04/2021  EARTH DAY 2021: Why should investors care about deforestation and how can it can be taken into account within an investment portfolio? 
The silent killer: How to prepare your portfolio for inflation
21/04/2021  Do investors need to worry about inflation, and how do you prep your portfolio to protect you from it? Morningstar Investment Management's Dan Kemp explains.
ESG investing is about more than feeling good: Morningstar equity research
20/04/2021  Values-based investing is ultimately up to the investor.
2 US wide-moat stocks to buy on a dip
16/04/2021  Amazon.com and ServiceNow are looking increasingly attractive.
Fidelity's Kate Howitt names her 3 top stocks for 2021
15/04/2021  Investment tips from Australian equities fund manager Kate Howitt.
Back to basics: What is income investing?
14/04/2021  What is income investing, why is it important and which investors should focus on it? Morningstar Investment Management's Dan Kemp has the answers.
Hunting for pockets of value in an overheated market: Morningstar
13/04/2021  Morningstar equity strategist Gareth James discusses the great value rotation, why he believes the Australian share market is overvalued and where opportunities still lie for hungry investors.
Vaccine rollout drives energy's rise
12/04/2021  But the sector's current tailwinds are likely unsustainable, so investors should prioritise high-quality businesses with stable balance sheets, says Morningstar's Dave Meats.
Finding value with Kate Howitt
08/04/2021  Kate Howitt oversees Fidelity’s Australian Opportunities fund. She discusses her investing approach, the outlook and where she sees value.
Investing for millennials
07/04/2021  Goldman Sachs's Laura Destribats talks about the millennial investment trend, and why tech and experiences are so important to this generation.
What if I want to buy Bitcoin?
06/04/2021  Remember that the returns on speculative assets like Bitcoin are high risk
EGG, SGF, ZBRA: Foraging for the unloved gems
01/04/2021  Steve Johnson explains why Forager Funds Management has bought and held Enero, SG Fleet and Zebra Technologies and why they're poised for further growth.
Why the 'covid spending economy' will flourish
30/03/2021  Forager's Steve Johnson explains why he's bullish on consumer spending, enterprise software companies, and why he has cashed in on big names like Uber.
Proteomics set for growth, says Kardinia
29/03/2021  Kristiaan Rehder explains why the West Australian biotech is among the top performers in the Bennelong Kardinia Capital Absolute Return Fund.
Should you be worried about inflation?
26/03/2021  And how to make inflation "personal."
Crypto what?
25/03/2021  The how, what, and why of cryptocurrency.
The long and short of an absolute return fund
24/03/2021  An absolute return fund aims to seek returns in all weather. Kristiaan Rehder from Bennelong Kardinia Capital explains how.
3 dividend-paying real estate stocks for your watchlist
23/03/2021  Diversified portfolios, strong balance sheets and healthy payouts. Grant Berry singles out three big contributors to the SG Hiscock Property Income Fund.
AREITs in the time of covid
22/03/2021  SG Hiscock's Grant Berry explains how real estate was affected by the pandemic, how property stocks coped, and the chase for income in an evolving retail landscape.
Have we reached peak video gaming?
19/03/2021  Video gaming has soared under lockdown, can this sector keep growing post-covid? Morningstar analyst Neil Macker takes a look.
Myer: five stars and poised for the rebound
18/03/2021  The retail giant's strong balance sheet will help it navigate the shift to online shopping and capitalise on the return to normal life, says Morningstar's Johannes Faul.
Deliveroo IPO: what you need to know
10/03/2021  Ahead of Deliveroo's IPO, Morningstar analyst Ioannis Pontikis looks at the outlook for the business, its valuation and concerns about gig workers.
2 stocks for the e-learning boom
08/03/2021  E-learning has become the norm for young students and university-goers across the world. Morningstar analyst Michael Field looks at whether the trend is here to stay. 
February Reporting Season Wrap Up with Peter Warnes: Webinar
04/03/2021  Special guest Peter Warnes, our head of equities research, joins the Morningstar Foundations of Investing Webinar series to give his unique take on February Reporting Season and answer subscriber questions.
One year after the market crash, through the ETF lens
03/03/2021  The growth and adoption of exchange-traded funds has only accelerated as a result of the latest market crisis.
Brighter picture for big four banks
01/03/2021  Morningstar's Nathan Zaia on the outlook for the banks, dividend payouts and the move by the Bank of Queensland to acquire ME Bank.
One year on: lessons learned from the 2020 bear market
25/02/2021  The biggest takeaway from that period is not to panic when the market tumbles.
What if...I want to buy a gold ETF?
23/02/2021  From ETFs backed by bullion to miners with more upside potential - here's how to get yourself some gold.
'Full return to normal in 2021'
23/02/2021  If the US is to stage a recovery by mid-year, it will need the consumer services sector to fire, says Morningstar's head of economic research Preston Caldwell.
Google, Facebook versus Aussie news stocks
19/02/2021  Morningstar's Brian Han weighs up News Corp's deal with Google and examines the effect of Facebook's decision to block content from Australian media outlets.
Global real estate as a store of value
18/02/2021  Quay Global Investors' Chris Bedingfield explains how self-storage, data centres and industrial property can offer diversification and growth.
Spotting the 'covid winners'
16/02/2021  Uniti Group and Nextdc are among the companies that SG Hiscock's Hamish Tadgell says have flourished during the pandemic.
The transition from hope to growth
15/02/2021  Hamish Tadgell of SG Hiscock explains the portfolio changes he’s made in a bid to capitalise on the shift.
The future of the US economy
10/02/2021  Which pandemic-related trends have already passed, and which ones might be around the corner?
GameStop frenzy is history repeating
05/02/2021  The battle between the Reddit army and hedge funds is nothing new—the question is will regulators be willing to step in, says Morningstar's John Rekenthaler.
Who are the fast fashion winners?
03/02/2021  Competition is fierce for fast fashion retailers such as Asos, H&M, Zalando and Inditex. Morningstar analyst Jelena Sokolova takes a look at the sector.
Can your portfolio withstand volatile times?
01/02/2021  Volatility can be around any corner, says Morningstar director of personal finance Christine Benz.
How much equity exposure is too much in retirement?
28/01/2021  Retirees require stocks' growth potential, but they need a cash and bond buffer, too.
Key trends for China investors
27/01/2021  Rebecca Jiang, manager of the JPMorgan China Growth & Income Trust, looks at why Chinese stocks soared in 2020 and whether the trend can continue.
Redpoint's 3 top picks in industrials
25/01/2021  Redpoint's chief executive and portfolio manager Max Cappetta tells Lex Hall why he's got his eye on JB Hi-Fi, Goodman and Reliance Worldwide in 2021.