Companies in Mirrabooka’s portfolio had strong 2022-23 reporting seasons. Portfolio Manager Kieran Kennedy shares the themes and highlights.
The results from the 2022-23 financial year reporting season surpassed expectations, both broadly across the market and for Mirrabooka’s portfolio of small and medium-sized companies. Expectations were fairly negative going into reporting season because of concerns about the economic outlook amid persistent inflation and high interest rates.
Three themes dominated. Firstly, the impact of higher interest rates, reflected in profit and loss statements, was greater than analysts had been forecasting.
Secondly, in terms of capital expenditure, the cost to grow companies is increasing which was evident across the market and certainly in the growth sector where Mirrabooka invests. That said, it didn’t unduly impact our outlook for the companies in our portfolio.
The third theme was the change in inflationary impacts around supply chains. Inflationary pressures that were especially evident during and immediately after the COVID pandemic are easing in some areas, such as freight rates and input costs but it’s a mixed bag. Wages growth is still strong and labour availability is improving but still presents some concerns for the longer run.
Mirrabooka’s portfolio performed well
Results from the companies in the Mirrabooka portfolio were generally good, particularly dividend outcomes.
We had around three quarters of the companies in our portfolio announce increases in dividends which reflects the quality of the companies in which we invest. Inflation has had an impact, but good companies have been able to pass that on through higher pricing to the benefit of their bottom line.
Pricing power is one of the key attributes that we consider when investing, and in this past reporting period many companies in our portfolio have shown that capability.
Pleasingly, there were very few disappointments in the reports of companies in our portfolio, which is not always the case in the small-cap end of the market.
Carsales.com had a fantastic result, having added overseas assets to its solid Australian business. This purchase is not without risk given the full price that was paid but it is already evident the company has added value to those assets and is starting to reap the benefits. This has alleviated concerns over what Carsales will do for growth once its Australian business matures, and the company now has many more long term growth options.
Other standouts were wealth management platform providers Hub24 and Netwealth. Both have endured subdued trading periods with market conditions becoming more difficult with equity markets became less attractive as interest rates started to rise. However, results were still solid and their outlooks good.
Another company in our portfolio that impressed was a lesser-known stock: audio-visual company Audinate which is replacing old cable technology used to link audio-visual equipment in a network with software. Audinate has been the market leader in the audio market for a number of years. The business was interrupted during the COVID pandemic as events using audio were cancelled, and post-COVID due to a chip shortage which created difficulties for the industry. Now that chips are available again, more customers are seeking Audinate’s technology and the outlook for the company looks really solid.
Companies are still cautious in their outlook
The reporting season provided more resilient company earnings than expected with companies in the Mirrabooka portfolio paying out a good level of dividends which was encouraging.
However, few companies are prepared to make forecasts for the next financial year given that interest rates are higher, the cost of capex is higher, and the economic outlook is uncertain.
We’re exploring new areas
Some companies are starting to look fully valued again, so we’re looking to new areas, such as resources.
We’ve been buying shares in “future facing” resources companies: rare earths company Lynas and lithium company IGO.
We’ve been underweight in lithium, but there’s been a shorter-term pullback in the IGO share price, providing us a favourable opportunity to acquire stock. Demand for electric vehicles is driving demand for lithium which is used in batteries. IGO has an interest in Greenbushes in Western Australia which we believe is the best lithium mine in the world because of its low production costs.
Lynas is a producer of rare earths, which are also used in batteries, wind turbines and other areas. Lynas is the only rare earths producer of scale outside of China and rare earths are becoming of greater strategic value because many countries do not wish to be beholden to China for access to these critical minerals. We expect Lynas to generate good production growth over the next five years.
We believe these stocks will provide attractive returns over the long term for our shareholders, in line with our investment philosophy.