Company results released during the February reporting season were good, with most companies in Mirrabooka’s portfolio meeting or beating expectations. Portfolio Manager Kieran Kennedy looks at the performance of the portfolio and shares insights into how the company is approaching the current market conditions.
Company results to the six months to the end of calendar year 2021 were solid but were overshadowed by various macro-economic factors – including fears of rising interest rates and inflation – which was ultimately reflected in easing share prices across many companies.
In the prior reporting season in June 2021, we saw a full rebound out of COVID with companies generating good margins and dividends that beat expectations. This raised expectations for the first half of FY22 and, although dividends in the latter period were better on aggregate, it was a mixed bag across different industries. A few industrial companies just missed expectations, with a lower level of confidence perhaps weighing upon payout ratios or market expectations simply being too high.
Supply chains were also very much a focus across all companies as they move away from the past practice of optimising inventory to try to maximise cash flow and returns. They are now focusing on securing adequate inventory to meet future customer demand which can limit cash flow and returns as a result.
In our portfolio, kitchen appliance supplier Breville Group and automotive components company ARB Corporation both reported elevated inventory. But both are quality companies with good products that have a long shelf life, and we believe they are well placed to navigate the current supply chain environment successfully.
Standout performers within the portfolio included digital property settlements platform PEXA Group, with the company upgrading its prospectus profit guidance on the back of a supportive Australian market and meaningful progress in the new UK market. Financial platform provider Netwealth also had a good result and is growing its market share. The market did however show some reservations around near-term profit margins because Netwealth is investing more in growing its workforce. However, we don’t believe this is a negative and feel Netwealth remains an attractive long-term investment for us.
Other great results from companies in our portfolio were Macquarie Telecom Group, which continued its growth trajectory and has a very good long-term outlook. Carsales.com and Corporate Travel Management were also pleasing, again demonstrating their resilience in yet another difficult economic environment.
Outlook for the coming year
In the last eight months, we have been more active in the portfolio than we are typically. We have trimmed our position in stocks that appear overpriced and invested in very good companies with the best long-term prospects. Companies that were prohibitively priced last year now represent better value ‒ for example, IDP Education, Auckland Airport, Realestate.com, and Carsales.com.
With so much global uncertainty around rising interest rates, inflation, the war in Ukraine, and the continuing pandemic, we believe stocks generally will be sold off. This creates opportunities for us to acquire more high-quality stocks as we invest for the long term and look to dividends to grow.
The war in Ukraine has caused a spike in prices for metals, energy and food and prompted a search for new sources of commodities. This does not have significant direct impact on our portfolio, but it does drive inflation.
Another issue that companies are currently grappling with is access to skilled labour, and a bidding war for talent will drive up company costs. But in this environment, quality companies that hold a strong market position should be able to recover some of those costs as they pass on increased pricing to customers.
Ultimately, the challenges are finite and total returns will again be generated by the fundamental performance of a business which is the basis on which we construct our portfolio.
Our approach remains the same: stick with quality companies that have good cash flow, good management, ability to pass on cost increases, and good growth prospects. And buy more if the opportunity is compelling. All this allows us to deliver long-term returns for shareholders.