Research notes

FY24 underlying profit has been downgraded by double digits, given lower 2H expectations for Pathology volumes and benefits. While 1Q saw high single -digit Pathology volumes and double-digit benefit growth, momentum faded in 2Q, with both metrics tracking in the low single-digit range. It appears soft GP attendances, coupled with labour shortages and inflationary pressures, continue to conspire in holding back volumes. While management is aiming to accelerate Pathology restructuring to better match volumes with costs, activity to date seems to have done little to move the dial, putting greater uncertainty around a solution and complete near-term turnaround. We lower our FY24-26 estimates, with our target price decreasing to A$1.37. Hold.

CUV’s posted a weaker than expected 1H24 result, with negligible top-line growth combined with a significant increase in the cost base (clinical activity, staff retention incentives and an increase in service roles) to meet future demand. While the top-line growth was disappointing, paired with large cost base increases and Board turnover it failed to inspire much confidence. Investors remain in the dark on US vs EU performance outside of cursory commentary. There was no discussion around capital management plans outside of stockpiling cash, now ~25% of the market cap. We downgrade our target price to A$16 p/s (from A$22 p/s) and recommendation moves to Hold, noting increased risk around board and disclosure. Traders may find an opportunity down here, but equally prepared to wait until a number of investor concerns are addressed.

An in-line CY23 result, although RIO hasn’t been immune to weakening metal prices (ex-iron ore) and global inflation pressures. Looks can be deceiving, but RIO commentary continues to run contrary to a popular view that the big miner might be an aggressive acquirer pursuing M&A. Despite the challenges, and capex in OTUG, RIO still generated FCF of US$7.7bn in CY23. We maintain a Hold rating on RIO, with a A$127ps Target Price.

IRE reported FY23 in-line with guidance: revenue of A$625.7m (+1.6%); and underlying EBITDA of A$128.3m (top-end of previous guidance). Whilst FY24 and exit run-rate ‘underlying’ EBITDA guidance was upgraded, IRE somewhat shifted the goal posts. ‘Adjusted’ EBITDA expectations now include ongoing project related costs of ~A$20m previously expected to be non-recurring. Positives included all divisions, excluding Super, showing hoh EBITDA growth; and confidence in two divestments. We expect significant de-leverage in 2H24. We can see an ongoing path for improvement for IRE and a material divestment (Mortgages) is a relatively near-term catalyst. However, after a solid re-rate and lower clarity on ‘base’ free cash flow generation post this result, we move to Hold.

Camplify’s (CHL) 1H24 result beat our GTV/revenue forecasts (+4-8%) showing robust pcp growth (+~95%). Excl. ~A$0.9m of one-off MyWay setup and platform integration costs, normalised EBITDA was -A$1.4m (vs -A$1.8m in the pcp). The stock closed down ~17% on result day, which we largely attribute to some seasonality in CHL’s key headline metrics (future bookings, gross margins, etc). We make several cost and margin assumption changes over the forecast period (details below). Our price target remains unchanged at A$2.85 and we maintain an Add recommendation on the stock.

1H24 was broadly in line with our forecast but was below consensus estimates. Due to 2Q macro issues and the UK Bridging contract materially underperforming expectations, CTD has revised its FY24 EBITDA guidance by 15.4% at the mid-point. Off this new base, CTD has a five-year strategy to double profits by FY29. The quantum of the earnings downgrade is clearly disappointing. Given the aggressive pivot in earnings guidance from the AGM last year, the market may take time to rebuild its confidence in the outlook. However, if CTD delivers even close to its five-year strategy, the share price will be materially higher in time. We maintain an Add rating with a new price target of A$20.65.

ACF’s 1H24 result was comfortably above our expectations. Key positives: EBITDA margin increased 570bp to 34.8%; Annualised return on investment (ROI) on growth capex of 58% was well above management’s target of >40%; Bad debt expense fell to 1% of sales vs 1.8% of sales in FY23. Key negative: ND/EBITDA increased slightly to 1.2x (vs 1.0x at FY23), although this was largely due to the MI Scaffold acquisition with the business only contributing two-months to earnings in the half. Management has maintained guidance for FY24 EBITDA of between $72-75m. As a result, we make minimal changes to FY24-26 earnings forecasts. Our target price rises to $1.40 (from $1.22) largely due to a roll-forward of our model to FY25 forecasts and we maintain our Add rating. Trading on 8.6x FY25F PE and 5% yield with strong business momentum and leverage to growing civil infrastructure activity over the long term, ACF remains one of our key picks in the small caps space.

SIQ reported FY23 NPATA +3% to A$63.2m, in-line with expectations. 2H23 reflects the commencement of EV-policy led demand flowing through – revenue +15.7% and NPATA +14.7% hoh. Lease demand accelerated hoh and SIQ is scaling up operating capacity to execute (~17% hoh cost growth; margins down 80bps hoh). Near-term earnings growth is highly visible, with a material contract to also contribute from FY25. There remains a material opportunity to drive lease uptake and earnings under the current EV policy (expected review date of 2027). However, we view SIQ’s valuation currently captures the near-term (FY24) expectations and we retain a Hold. The main risk is any unplanned early removal of the current EV policy (election risk), post a period of operational expansion.

While WOW’s 1H24 result was in line with expectations following the company’s trading update in January, commentary on sales for the first seven weeks and divisional guidance for 2H24 was softer-than-anticipated. Key positives: WooliesX earnings jumped 132% reflecting increased demand for convenience and productivity improvements; Operating cash flow increased 20% with ND/EBITDA improving to 2.5x (FY23: 2.6x). Key negatives: Inflation continued to moderate and consumers are becoming more cautious; Customers continued to reduce discretionary spending and Woolworths Supermarkets was losing market share in discretionary everyday needs categories such as pets, baby care and home essentials. CEO Brad Banducci has announced his retirement with Amanda Bardwell (current Managing Director of WooliesX) to take over in September. We adjust FY24/25/26F group underlying EBIT by -2%/-3%/-3%. Our target price decreases to $34.70 (from $39.45) and we downgrade our rating to Hold (from Add). With NZ Food and BIG W already facing tough operating conditions, the soft start to 2H24 for Australian Food and loss of market share in non-food is a concern. WOW is now trading on 22.2x FY25F PE and 3.3% yield. With an increasingly uncertain outlook, we have become more cautious on the stock with downside risk if the trading environment continues to deteriorate.

STO posted a CY23 earnings result that on balance was on the softer side, although materially beat on its dividend. CY23 cash dividend will total US26.2ps, well above our estimate of US20cps. All growth projects remain on track, with Barossa first gas in 2025, Pikka Phase 1 first oil in 2026, and Moomba CCS first injection in mid-CY24. No changes to CY24 production or cost guidance. Strategic review process is ongoing, with no updates ready to include with the CY23 result. Further volatility could yield a better entry opportunity, maintain Hold rating.