Research notes

1H results were mixed, as elevated costs impacted margins and the bottom line, while revenue and underlying results were broadly in line. The base business (ex-Covid-19 testing) continues to perform well, with growth across all key geographies, while Radiology also showed strong, but Clinical Services remains soft on lower Covid-19-related services. Uniquely, right-sizing for rapidly declining Covid-19 testing revenues (-90%) has combined with recent acquisition costs, pressuring margins and profitability. However, management remains confident in a turnaround, outlining numerous near/medium term drivers supporting underlying profitability and reflected in guidance, which we view as achievable. FY24-26 estimates move lower, with our target price decreasing to A$34.05. Add.

In line with expectations, the 1H was messy and down on the proforma pcp due to the merger and acquisition accounting. The 1H is northern hemisphere skewed but it had a weak USA result due to a challenged vehicle sales performance. The 2H24 will benefit from a strong ANZ high season (THL’s biggest market) given high rental yields and a larger fleet. Synergies are also more 2H weighted. Due to higher debt and interest, THL’s has revised its FY24 NPAT guidance to ~NZ$75m from >NZ$77.1m previously. It reconfirmed its NZ$100m NPAT target in FY26. We have revised our FY24/25 forecasts and left FY26 unchanged. While THL’s valuation metrics look undemanding (FY25 PE of 8.7x) for a global, market leader, it is lacking share price catalysts in the near term. Add retained.

NWL reported 1H24 underlying EBITDA +27% on pcp (to A$58.8m) and underlying NPAT +28% (A$39.3m). The result was in-line with expectations. NWL expressed confidence in improving net inflows, with the higher gross outflow trend improving and several ‘important’ new licensees transitioning. Ongoing product and revenue stream development continues. We expect in-house international trading capability to deliver incremental revenue growth. NWL’s opportunity and growth runway remains long. However, we see the stock trading at fair value. Hold maintained.

ARB’s strong margin outcome led to a bottom-line beat on 1H24 expectations, delivering $51.3m in NPAT (+8.2% pcp; +25% on 2H23). Sales were flat on 1H23. GM of ~57.5% was ahead of the recent 1Q24 update (~55-56%); well above the pcp (~53%); and was driven by price rises coinciding with normalising input costs. ARB noted it expects to maintain current (elevated) margins through 2H24; are seeing signs of rebounding Export trade (growth in Jan-24); reiterated ongoing order book strength; focusing on network growth (domestic and offshore); and further product development (three new significant products set for CY24). However, despite the otherwise strong result, we view ARB as fully valued at current levels (~28x FY25 PE; ~2.5% FCF yield) and are conscious on the potential operating deleverage impact to earnings given the limited top-line growth and (near) peak GM levels. Hold maintained.

Step One (STP) performed exceptionally well in the first half of FY24, delivering strong growth in all markets and across both men’s and women’s products. In our opinion, the strategy of focusing on profitable growth is paying dividends, allowing investors to once again think about just how big this business could become over time. The launch of new partnerships with SLSA in Australia and John Lewis in the UK offer a glimpse at the potential diversification of routes to market. There is also potential to add more product adjacencies to further expand the TAM. Sales in 1H24 were up 26%, including 44% growth in the sale of women’s products. Gross margins were up 50 bps, which, together with higher sales, increased EBITDA by 36% to a record $10.1m, 84% of the EBITDA from the whole of FY23. We have made no major changes to estimates. We believe STP is capable of delivering further significant growth in earnings in the year ahead. We reiterate our Add rating and increase our target price from $1.20 to $1.65.

JDO’s unaudited result, detailed FY24 guidance, and FY25 growth expectations had been pre-released. The audited result disclosures released today provided more detail on these items for the market to consider. At-scale targets were re-affirmed. FY29 potential valuation c.$2.50/sh. 12 month target price lifts 2 cps to $1.52. ADD retained.

HUB reported in-line with expectations: group underlying EBITDA A$55m (+10% on pcp; -5% hoh) and underlying NPAT A$30.4m (+14% pcp; -6% hoh). The core Platform division delivered 10% hoh EBITDA growth, whilst still investing for growth (Platform opex +15.5% and group headcount +5% hoh). 2H24 FUA growth has commenced strongly (+3.3% to A$74.8bn), with ~A$1.2bn implied net inflows. HUB is on track to hit >A$16bn net inflows (inc transitions). HUB’s product offerings continue to lead the market (along with NWL); the runway to secure additional adviser market share remains material; growth from adjacent markets is possible; and scale benefits should drive margin expansion in time. We continue to see long-term upside in the stock, however we are looking for a market-led pull back for a more attractive entry point.

ANZ has won on its appeal with the Australian Competition Tribunal for the right to buy Suncorp’s bank, overturning the ACCC’s previous decision to block the deal.   We have always thought the SUN bank sale price (~12.5x earnings and ~1.3x NTA when announced) was reasonably solid, and the deal value is above Morgans current valuation for the bank (1x NTA). We remove the bank from our SUN earnings forecasts from August, and factor in a pro-rata capital return and a A$300m special dividend from the net sale proceeds. Our FY24F/FY25F EPS is lowered by ~8%-9% reflecting these items, but our valuation rises to A$16.42 on transaction value accretion and a model roll-forward. With SUN still having >10% TSR upside on a 12-month view, we maintain our ADD call.

BBN reported 1H24 earnings in line with last month’s pre-release. It was a tough half for BBN, with the consumer under pressure and price competition intense. Although it was encouraging to see the trend of lower new customer acquisitions arrested in recent weeks, the 3% LFL sales decline since Boxing Day shows the environment remains challenging (and highly promotional). We’ve made no major changes to our estimates with our FY24 NPAT forecast coming down 2%. We continue to believe BBN will grow earnings in FY25 as its simpler price architecture and greater focus on value start to drive the top line. We retain an Add rating and $2.00 target price.

RWC’s 1H24 result was ahead of expectations with Americas the key standout. Key positives: Americas EBITDA rose 19% in a subdued trading environment; Group EBITDA margin declined by only 10bp despite lower volumes in EMEA and APAC, helped by cost reduction initiatives. Key negative: EMEA external sales in FY24 are now expected to decrease by low double-digit percentage points vs down high single-digits previously. We make minimal changes to FY24-26F underlying EBITDA but increase underlying NPAT by between 9-10% due to lower net interest and tax expense following updated FY24 guidance. Our target price increases to $5.25 (from $4.20) on the back of changes to earnings forecasts and an increase in our PE-valuation multiple to 17x (from 15x previously). Following the strong 1H24 result with momentum from the introduction of new products and cost reduction initiatives, we think RWC is well-placed to benefit when lower interest rate expectations translate into stronger demand.