Insights
The Month Ahead | February 2025 Reporting Season Key Results
February in focus - adapting to a changing environment. Our focus in February is on companies and sectors that continue to see margin resilience and positive earnings trends.
February Reporting Season 2025 has kicked off. The February reporting season offers a crucial window into corporate Australia's health, with company-specific performance taking precedence over macro considerations. While earnings and share prices have shown remarkable resilience since the August reporting period, the focus shifts to companies' ability to maintain margins and drive growth amid subdued trading conditions, particularly as earnings growth moderates in FY25.
With a modest earnings outlook companies have been forced to adapt to the softer trading environment. Our focus in February is on companies and sectors that continue to see margin resilience and positive earnings trends. Large caps is another area to monitor given historically high valuations and strong performance over the past 12 months. Last August demonstrated that high expectations and in-line results might not be enough. The recent swing in the AUD will also complicate FY25 earnings and those exposed to currency fluctuation could see earnings volatility around the result.
In The Month Ahead this month, we highlight three companies from our key results to watch: Pinnacle Investment Management (PNI), Superloop (SLC) and Lovisa (LOV).
Pinnacle Investment Management (PNI)
RESULT: 5 FEBRUARY 2025
We expect outperformance driven by performance fees
We expect a strong result from PNI, driven by a combination of higher FUM through the period and strong performance fee contribution. We expect PNI can outperform consensus expectations based on higher performance fees. Key numbers include underlying 1H25 NPAT (forecast +105% on pcp to A$61.9m); and affiliate profit share (forecast +82% on pcp to A$68.1m).
Core flows and leveraging Horizon 2 spend
Current momentum and the outlook for flows is always in focus. We expect confident commentary from PNI, in part supported by new affiliates (e.g. Lifecycle). Horizon 2 spend has ramped up in recent years (primary driven by Metrics) and the market will be looking for some commentary or evidence that returns are starting to materialise.
Cashed up and ready
PNI has ample ‘dry powder’ following an equity raise in Nov-24. Commentary on the early performance of recently acquired stakes and the pipeline will be in focus.
Superloop (SLC)
RESULT: 21 FEBRUARY 2025
FY25 outlook
SLC expects FY25 underlying EBITDA of $83–88 million. We estimate $35.8 million for 1H25 (41% of full-year earnings), slightly below market consensus of $38 million (as of Jan 17, 2025). Since guidance was set in Feb 2024, there’s potential upside. One-off $5.5 million expenses in 1H25 include legal fees from ABB’s failed takeover and costs for acquiring Optus/Uecomm fibre assets (finalising by Mar 2025). A Vostronet earnout will also impact cash flow. Despite this, we expect net debt to decline slightly.
NBN subscribers (organically and Origin originated)
We forecast SLC will deliver slightly fewer NBN net adds in 1H25 (+31k yoy to 354k) vs +33k yoy in 1H24. This is due to our assumption that SLC has prioritised the material Origin migration. This assumption could prove conservative. Origin is, by our maths, the largest single EBITDA driver in FY25. We expect Origin to have ~155k NBN subscribers at year end, noting some of the Origin labelled ‘subscribers’ include voice products which SLC does not provide. We also assume organic growth in Origin is relatively slow in 1H25 due to the migration from ABB onto SLC. This should hopefully re-accelerate above its historical ~4.5k monthly net adds in early 2H25, although this is not within SLC’s control.
Business
The business segment remains challenged (NBN/macro driven price erosion), but we should still see some growth and are optimistic competition should settle in the latter half of CY25. We await clarification on the industrial logic around the Optus fibre acquisition which is likely largely back-haul cost avoidance for Smart Commmunities, and also provides SLC with the ability to more efficiently bring to market new product innovations (revenue upside).
Lovisa (LOV)
RESULT: 24 FEBRUARY 2025
Double-digit growth in earnings to continue
We see Lovisa’s half year result as an opportunity for it to remind investors of the growth in earnings it continues to deliver. We forecast a double-digit increase in revenue and income, all organic, driven by ongoing network expansion and higher gross margins. Our EBIT forecast of $93.1m is largely in line with consensus and represents 14% growth on 1H24. We forecast LFL sales of +1%. We expect the store count to have risen to 939, a net increase of 39 over the half, including 12 since the AGM trading update. This is clearly below the rate of expansion achieved in recent periods but maintains the positive long-term trend. We forecast a further increase in the gross margin to 81.5%. Lovisa’s results have seen some wild share price reactions in the recent year. We don’t expect a repeat in February, but the combination of a high P/E and high growth forecasts is always a potent mix.
The pace of expansion is due to accelerate
The key theme in the result will be the sluggishness of recent store rollout activity. The net addition of 39 stores we forecast for 1H25 falls 26% short of 1H24 and 55% below 1H23. In fact, if our number is right (and we are in line with consensus), it will be the slowest half year for network expansion since 1H21. Investors are justified in asking what’s going on. A key reason, in our view, is the need for Lovisa to consolidate after an extended period of very rapid growth in the US. The other reason is more nuanced. Lovisa has entered a large number of brand-new markets in the past two years. Its modus operandi is to spend around 24-36 months in any new market to become familiar with customers, landlords, competitors and price points before proceeding to expand. If we’re right, this is the calm before the storm and the pace of growth is about to get a whole lot faster.
We think it gets better from here
We think 2H25 will be a better (relative) period than 1H25. We forecast 63 net new store openings in the second half, with LFL sales growth picking up to +3%, despite comps getting more difficult. Earnings are always weighted to the first half (Christmas, BFCM and all that) but the 61/39 skew we forecast for FY25 tilts more to the second half than in any year since FY22.
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Following the RBA's recent decision to hold interest rates, RBA Governor Michelle Bullock said, "where we are now is where we need to be." Chief Economist Michael Knox gives his comments on this saying that the RBA are giving us stability for the near future.
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- Australian corporates again shrugged another reporting test, navigating slowing demand and higher interest rates to post respectable half-year results in February.
- The market’s surge since late 2023, pushing prices to narrow discounts, appears a bigger hurdle to 2024 upside for the ASX20 leaders than earnings or economic fundamentals.
- We explore key themes including: 1) resurgent activity in mid/small caps including M&A; 2) politicisation of supermarket profits; 3) a resilient high-end consumer; and 4) better-than-feared A-REIT results.
- Our best ideas from reporting season include: RMD, NXT, TWE and QBE. Tactical small cap opportunities include: UNI, HLO, AVH, AHL, HCW and AIM.
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February results snapshot and 2024 outlook
Overall, February results provided another important signpost that the health of Australian listed companies remains in good shape. Large-cap stocks missing expectations did remain slightly elevated, reflecting a softer economy. However, this trend, along with a pickup in dividend payout ratios, did improve on August lows, offering comfort that Australian corporates are in robust shape.
Earnings expectations for FY24 actually ratcheted 0.5% higher led by the Banks, Healthcare and Retail. This suggests ongoing conservatism in market forecasts, offering some margin of safety against surging valuations. While plenty of companies did miss expectations, price reactions across the market were positively skewed reflecting a sense that results were largely better-than-feared.
We’re not calling the start of another bull market but do see plenty of reasons to be optimistic in 2024. A likely reduction in interest rates, cooling inflation and plenty of dry powder should be broadly supportive for equities. While there will be some bumps along the way, barring an economic collapse, we think the next 12 months will be kind to investors.
However, discounts to consensus price targets among the market leaders have narrowed significantly. In fact Morgans analysts retain an Add on only four out of the ASX20 large-caps we cover (COL, CSL, S32, WDS). This narrows the path for returns in 2024. We think the best opportunities lie among smaller caps and those positively leveraged to declining interest rates and stickier inflation (A-REITs, small growth and cyclicals).
Solid earnings not enough to sustain large cap valuations
The market’s 12% rally from November to January provided resistance against rewarding larger companies at February results. The ASX 20 large-caps had a sluggish February, easing 0.4%, as heavyweights BHP, WDS, CSL, TLS and WOW fell between 5-9%.
Results were mostly inline but we think a tepid growth outlook (Banks), political risk (Supermarkets) and above-average valuations (ex-Resources) contributed to these stocks’ inability to find another gear
Small-cap resurgence takes shape
Small/mid-cap growth and cyclicals were the bigger story in February, providing a higher proportion of results beating expectations, with a higher-than-average number positively surprising on margins and revenue. Earnings forecasts also held up well in key cyclical segments.
Notably, cyclicals (Retailers, Industrials) represent a larger proportion of the small cap index than for large-caps. So, if the slowdown proves to be milder than anticipated and earnings hold, valuations provide plenty of support here.
We expect plenty of ongoing opportunities in small-caps as the segment continues to re-base. Fresh small-cap opportunities being called out by Morgans analysts include Helloworld, NextDC and Universal Stores.
M&A tailwinds in place
M&A activity has returned with some vigour with ABC, BLD, CSR, APM, AWC, AND, SLC, and AVG having received recent interest.
Activity looks set to accelerate on belief in a turn in the interest rate cycle combined with plentiful cashed-up buyers (particularly private equity and super funds) seeking acquisitive growth as an alternative to sluggish organic growth.
Morgans analysts nominate 24 companies with takeover appeal including Judo Bank, Dalrymple Bay Infrastructure, Tyro Payments, Pilbara Minerals and AI Media.
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Our best ideas are those that we think offer the highest risk-adjusted returns over a 12-month timeframe supported by a higher-than-average level of confidence. They are our most preferred sector exposures.
Additions: This month we add Pilbara Minerals (ASX:PLS), Universal Store (ASX:UNI), Beacon Lighting (ASX:BLX) and Avita Medical (ASX:AVH).
Removals: This month we remove Macquarie Group (ASX:MQG), Aristocrat Leisure (ASX:ALL), Lovisa (ASX:LOV), A2 Milk (ASX:A2M), Corporate Travel (ASX:CTD), Transurban (ASX:TCL), Qantas (ASX:QAN) and Tourism Holdings (ASX:THL).
Large cap best ideas
Treasury Wine Estates (ASX:TWE)
It may take some time for the market to digest TWE’s acquisition of Paso Robles luxury wine business, DAOU Vineyards (DAOU) for US$900m (A$1.4bn) given it required a large capital raising. The acquisition is in line with TWE’s premiumisation and growth strategy and will strengthen a key gap in Treasury Americas (TA) portfolio. Importantly, DAOU has generated solid earnings growth and is a high margin business. It consequently allowed TWE to upgrade its margins targets. While not without risk given the size of this transaction, if TWE delivers on its investment case, there is material upside to our valuation. The key near-term share price catalyst is if China removes the tariffs on Australian wine imports.
CSL Limited (ASX:CSL)
While shares have struggled of late, we continue to view CSL as a key portfolio holding and sector pick, offering double-digit recovery in earnings growth as plasma collections increase, new products get approved and influenza vaccine uptake increases around ongoing concerns about respiratory viruses, with shares trading at 25x, a substantial discount (20%) to its long-term average.
ResMed Inc (ASX:RMD)
While weight loss drugs have grabbed headlines and investor attention, we see these products having little impact on the large, underserved sleep disorder breathing market, and do not view them as category killers. Although quarters are likely to remain volatile, nothing changes our view that the company remains well placed and uniquely positioned as it builds a patient-centric, connected-care digital platform that addresses the main pinch points across the healthcare value chain.
QBE Insurance Group (ASX:QBE)
With strong rate increases still flowing through QBE's insurance book, and further cost-out benefits to come, we expect QBE's earnings profile to improve strongly over the next few years. The stock also has a robust balance sheet and remains relatively inexpensive overall trading on 8x FY24F PE.
Mineral Resources (ASX:MIN)
MIN is a founder-led business and top-tier miner and crusher that has grown consistently despite barely issuing a share over the last decade. Also helping our investment view is that MIN’s diversification leaves it far more capable of tolerating volatility in lithium markets than its peers. We see MIN’s lithium / iron ore market exposures as an ideal combination to benefit from the China gradual recover. We also see MIN as well placed to grow into its valuation, even if we see unexpected metal price volatility, given the magnitude of organic growth in the pipeline.
South32 (ASX:S32)
S32 has transformed its portfolio by divesting South African thermal coal and acquiring an interest in Chile copper, substantially boosting group earnings quality, as well as S32's risk and ESG profile. Unlike its peers amongst ASX-listed large-cap miners, S32 is not exposed to iron ore. Instead offering a highly diversified portfolio of base metals and metallurgical coal (with most of these metals enjoying solid price strength). We see attractive long-term value potential in S32 from de-risking of its growth portfolio, the potential for further portfolio changes, and an earnings-linked dividend policy.
Pilbara Minerals (ASX:PLS) - New addition
We view PLS as a fundamentally strong and globally significant hard-rock lithium miner. The company has successfully executed on ramping up the expansion of Pilgangoora, while progressing plans to expand output (P680 and P1000). Supported by a strong balance sheet, with net cash at ~A$2.1bn at the end of December, PLS’ expansion plans remain uniquely undeterred by the significant weakness in lithium prices. For PLS, the best form of defence against lithium prices is to stay on the attack, with its medium-term plans to continue expanding its production aimed primarily at building greater economies of scale and a more defensive margin.
Woodside Energy (ASX:WDS)
A tier 1 upstream oil and gas operator with high-quality earnings that we see as likely to continue pursuing an opportunistic acquisition strategy. WDS’s share price has been under pressure in recent months from a combination of oil price volatility and approval issues at Scarborough, its key offshore growth project. With both of those factors now having moderated, with the pullback in oil prices moderating and work at Scarborough back underway, we see now as a good time to add to positions. Increasing our conviction in our call is the progress WDS is making through the current capex phase, while maintaining a healthy balance sheet and healthy dividend profile. WDS still has to address long-term issues in its fundamentals (such as declining production from key projects NWS/Pluto), but will still generate substantial high-quality earnings for years to come.
Morgans clients can download our full list of Best Ideas, including our mid-cap and small-cap key stock picks.
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Following the latest meeting of the Reserve Bank of Australia (RBA), Morgans Chief Economist Michael Knox explains that the RBA minutes don’t say rate cuts are a shoo in at all.
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Morgans Chief Economist Michael Knox explains how the different dates of international financial years generate seasonal variation in the Australian and US stock markets.
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