With another company reporting season concluded during global economic uncertainty and volatility, Djerriwarrh Managing Director Mark Freeman and Portfolio Manager Kieran Kennedy discuss some of the companies in the Djerriwarrh portfolio poised to deliver solid returns over the long term.
Given our long-term investment focus, the 2021/22 company reporting season has enhanced our confidence in the stocks in our diverse portfolio and their ability to generate superior dividends.
The overall tone was of “resilience”, and we’re comfortable with the performance of the companies we’re invested in.
Unsurprisingly, businesses are still feeling the impact of common economic themes: rising inflation, continuing supply chain challenges, cost pressures which have driven up prices, and a tight labour market arising from COVID-related absenteeism and the number of job openings outweighing job seekers.
Pressure on supply chains appears to be easing, but for companies that are holding a higher volume of inventory, investors are focusing on how that may unwind.
Companies are generally resilient
Despite challenging economic conditions, Australian businesses are continuing to perform well. Amid uncertainty of what lies ahead, demand for their products and services appears steady for now.
Company reports haven’t reflected the negativity surrounding equity markets and various economies up to this point. That’s not to say it’s not coming; we don’t know if inflation pressures will dissipate, and rising interest rates may impact consumer demand and business outlook in the next six months. But for FY22, the outlook comments were about uncertainty rather than a level of negativity.
Revenue, profits and dividends were generally in line with or slightly better than market expectations.
Revenues were quite strong compared to historical performance as companies passed on higher costs by increasing prices. Having a strong market position which provides the ability to pass on cost increases is an important element in selecting companies for the Djerriwarrh portfolio.
Our quality stocks stand out
Reporting season reinforced our view of the quality of the companies in our portfolio and their prospects over our preferred long-term investment horizon.
Online real estate advertising firm REA Group and online automotive marketplace Carsales.com both delivered pleasing results. REA reported significant growth in revenue, profit and dividend and indicated it has a clear strategy for future growth, while Carsales’ Australian and international assets generated a strong financial performance and expectations are for continued strong growth as well.
Two other companies that showed their quality were automotive accessories supplier ARB Corporation and plumbing and bathroom products supplier Reece.
ARB had a big profit jump during COVID, and the market was expecting profit to start to come off which hasn’t occurred, and profit has been resilient. Reece meanwhile made a large acquisition in the US at a time when concerns about the US economy were emerging. Despite this risk, the acquisition has delivered according to plan and Reece is performing well.
We also have ‘stalwart stocks’ in our portfolio which we invest in for their consistent performance and earnings resilience.
For example, supermarkets Woolworths and Coles remain steadfast with a solid outlook despite the impact of COVID-related workforce absenteeism and higher costs.
Sleep and respiratory care device manufacturer ResMed impressed with its commentary around what is occurring in its market and exemplifies our approach to investing in companies that can develop a market leading position.
Other stocks worthy of mention are electronics retailer JB Hi-Fi and conglomerate Wesfarmers. While consumer spending is holding up for now, consumer sentiment is weak and the market has some concerns over how earnings may be impacted if spending softens. However, we feel the leadership positions of both companies will hold them in good stead over the long-term.
The results for energy stocks Woodside and Santos reminded people of the value in producing and supplying gas from Australia rather than Russia. Demand for LNG has surged because of the war in Ukraine, benefitting both Woodside and Santos. Both companies are also now markedly different compared to two years ago. Woodside’s merger with BHP’s oil and gas assets have made it more robust, with a stronger balance sheet and an improved ability to allocate capital to the best opportunities.
These are also factors in our investment considerations and help define our portfolio’s strength. It’s a similar story for Santos following its takeover of Oil Search.
Our approach is cautious and patient
Djerriwarrh paid a substantially higher dividend to shareholders as a result of dividends produced by the companies in our portfolio and income from option activity.
As yet the economy does not appeare to have markedly slowed which suggests dividend income could be maintained. A weakening iron ore price may reduce dividends from big miners BHP and Rio but we’re still expecting good dividends across the rest of our portfolio in the shorter term.
However,given the economic background suggests a challenging time ahead for company earnings over the medium term as margins of some businesses may come under pressure , our approach is cautious.
As a long-term investor, we’re patient and will seek to take advantage of opportunities that we believe will add value to our portfolio and for our shareholders, including utilising heightened market volatility to generate good option income.