Ausbil stock winners from reporting season


by Carolyn Herbert

Transcription of Finance News Network Interview with Ausbil Australian Active Equity Fund Director of Equities, John Grace

Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from Ausbil’s Australian Active Equity Fund, is Director of Equities, John Grace. John welcome back.

John Grace: Thanks Lelde, good to be here again.

Lelde Smits: Australia’s major reporting season has just wrapped up. What were the major features you identified?

John Grace: There are three main features of the reporting season we’ve identified. Firstly the economy is quite patchy, so there have been some winners and losers as a result of that. Secondly, most of the earnings growth has come through cost cutting, as opposed to operational leverage. And thirdly, as a result of low interest rates, companies have actually improved their balance sheets quite significantly. And they’ve used that opportunity to raise dividends, offer some special dividends and also participate in some stock buybacks. So shareholders have been rewarded.

Lelde Smits: How did the results compare to your expectations?

John Grace: Overall the results were reasonable. We had about 70 per cent of companies exceeding, or at least meeting expectations. But the one key through all of that was that the dividend growth was nearly double that of the earnings growth.

Lelde Smits: Which stocks performed the best for the Australian Active Equity Fund over reporting season?

John Grace: A few notables for our portfolio. Firstly, CSL Limited (ASX:CSL) which had a nice beat relative to expectations, a significant lift in dividend and another $950 million buyback. The stock rallied nicely post result up around 15 per cent. Harvey Norman Holdings Limited (ASX:HVN) is also another stock that performed well for us. It has leveraged to the improving housing cycle and as a result, margins were better. And the stock also rallied nearly 15 per cent through that reporting period. And thirdly, a company called Ardent Leisure Group (ASX:AAD) which owns Dreamworld on the Gold Coast. And some of the AMF Bowling Centres also had a very strong profit result, and the stock rallied nicely post the earnings result.

Lelde Smits: Which stocks didn’t perform so well over reporting season?

John Grace: A couple of indifferent results for the portfolio. Firstly, JV Hi-Fi Limited (ASX:JBH) which disappointed, particularly with its guidance and saw some weak like for like sales hitting July in particular, in their business. And the stock underperformed on the day. Hopefully as the Christmas period comes around, we’ll see some new products coming onto market and we should see a better result through that Christmas trading period. Secondly is BlueScope Steel Limited (ASX:BSL), which also disappointed during the reporting season. The operational leverage hasn’t quite hit that business just yet, we expect a better result in February.

Lelde Smits: Which positions have you added following reporting season and why?

John Grace: A few notable ones that we’ve added to the portfolio. Firstly, Asciano Limited (ASX:AIO) which had a very solid result and relative to expectations, beat the market. The business is post capex and we believe that the runway for that business and its earnings, look very solid over the next few years. So we’ve added to that position. Secondly, QBE Insurance Limited (ASX:QBE) which had a profit result that has steadied expectations. And they also announced a capital raising, which we participated in. And thirdly, Dick Smith Holdings Limited (ASX:DSH) which is a retailer, had a solid result relative to expectations, and we do expect that stock to trade well into the Christmas period.

Lelde Smits: Which positions have been altered and what brought on the decision?

John Grace: We’ve taken the opportunity to tacitly reduce BHP Billiton Limited (ASX:BHP) through the reporting season. We like the result and really like the opportunity to participate in the spin-off of its non-core metals business, which we believe will be welcomed by shareholders. However, it will take about nine months and we believe we just reduce that position, and use the money elsewhere in the portfolio. Secondly, we’ve reduced also the position in the banking sector. Again results have been pretty solid through the reporting season, but again, we prefer to use that money elsewhere in the portfolio.

Lelde Smits: Looking ahead, which themes do you believe will define the remainder of the year for Australian shares?

John Grace: Three key things to look out for over the next 12 months. We believe the Australian economy will continue to improve and any sector related to housing, or any stock related to housing, we think should be a strong beneficiary of that recovery. Secondly, as board and management get more confident with the economic recovery, we’ll see some more M&A hit the Australian market. And thirdly, there’s a huge pipeline of IPOs coming through. We think there’re some good opportunities through that and in particular, we’re looking forward to the Medibank privatisation.

Lelde Smits: Finally John, where will Ausbil be looking to for opportunities?

John Grace: As the economic recovery continues, there’ll be plenty of opportunities in additional sectors, not just the housing sector. So we’re looking for opportunities in the retail, in media and transport to populate the portfolios, i.e. the cyclicals. Secondly, with a lot of IPOs about to hit the market, there’ll be plenty of opportunities in that IPO market and some really interesting businesses to add to the portfolio, over the course of the next months. 

Lelde Smits: John Grace, thank you for the update from Ausbil’s Australian Active Equity Fund.

John Grace: Thank you Lelde.


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