Australian macro, NXL and FPH
The RBA left policy settings unchanged, as expected. Overall, yields, and risky assets, were little moved.
The RBA’s forward guidance continues to remain in effect, predicated on wages growth outstripping productivity (which is what drives inflation), an event they don’t expect to see until 2024.
The “throat-clearing” about housing continues…
…which strikes us as sensible given the below (today’s CoreLogic print showed a month on month rise of 2.4%, and the highest consecutive set of month on month prints in about 40 years).
To us, there’s a clear warning tone in the RBA messaging, for both house prices (which in our view are overheated) and for lending (which is the same thing, mortgage credit drives house prices).
We are reasonably sceptical about the quality of those loans, given the below graph, and are absolutely sceptical that even if the lenders have put a reasonable degree of thought into the loan, the buyers haven’t.
Still, the next 12 months should see some pretty robust demand for the building materials companies, as approvals translate into commencements.
We’ve chosen ABC (ADBRI, formerly known as Adelaide Brighton Cement) as our primary exposure within materials to this thematic. Stocks like BLD and CSR arguably offer a greater exposure to housing related activity, but a) we prefer the high quality cashflows on offer in ABC (below)…
…which we view as being more consistent/predictable over time (BLD, below) and b) we are also comfortable with ABC’s relatively greater exposure to infrastructure expenditure (for which Australia has a perennially decent pipeline) and to the mining sector, which, thanks to strong commodity prices, should see some reasonably robust investment to lift production.
Nuix (NXL), a recent tech IPO, has fallen spectacularly after releasing multiple downgrades to markets, leading to some articles in the Financial Review attempting to detail what has gone operationally wrong. (NXL is not in our portfolios.) The articles are fine, but our explanation is a bit more straightforward.
Nuix was listed at EV/sales of around 9x, an extremely high price for an essentially unproven company with next to no profits. Any hiccups, with such a limited track record, are bound to be met with capitulation. The 60% rally over the initial weeks from listing at an already elevated valuation was less of an indicator of “money left on the table” and more of an indicator of exuberant expectations.
We continue to prefer IRE (IRESS) in the tech software as a service space, noting it is a high quality, proven, cash generative business growing at moderate to high single digits.
FPH (Fisher & Paykel Healthcare) reported over the past week. The stock, which is also not in our portfolios, was sold off heavily post the result, which had a fairly long list of negative sounding outlook statements.
The loose translation of all that is “things are not likely to get any better from here”, which, for a stock on a forward PE of circa 40x, makes FPH a magnificent company with an uncompelling valuation.
We should note that we have an exposure to CSL, which has a broadly similar set up as FPH, in that COVID has bolstered earnings (the Seqirus business is about seasonal flu vaccines, which everyone went and got when COVID hit), however we are reasonably optimistic on CSL upgrading earnings between now and the next result.
CSL generated ~$1.8bn at the most recent half, and only needs to generate $0.5bn in the current half to hit the street (consensus) full year expectation of $2.3bn. The last few second halves have seen NPATs closer to $650-700m, which to us means CSL has a relatively low bar to jump.
It is possible that the market is more concerned about the FY22 guidance outlook, and in turn that may well be predicated on the lagged affect of plasma collections in the US over the COVID period (with such a high amount of unemployment insurance on offer in the US, paid plasma donations of $20 have been much less attractive than they used to be). However we think that the de-rating in the share price over the past year also reflects this concern.
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