Company Interview / Morningstar's reporting season winners & losers

Lochlan Holloway from Morningstar describes reporting season as balanced and benign, with fair value estimates seeing a modest 1% average upgrade. Retail updates show positive signs, especially for JB Hi-Fi (ASX:JBH) and Super Retail Group (ASX:SUL), despite challenges like wage cost inflation.

Lochlan notes Premier Investments' diverse business helps set it apart. In the banking sector, Australian borrowers show resilience with low bad debt expenses. Brambles (ASX:BXB) stands out, seeing a 20% upgrade due to improved efficiency and market performance.

Lochlan discusses mixed reactions to stocks like A2 Milk (ASX:A2M), highlighting its long-term potential despite short-term issues. Mining sector concerns persist, with a cautious outlook on iron ore prices. Brambles and Wisetech (ASX:WTC) are upgraded, while Audinate (ASX:AD8) and Megaport (ASX:MP1) face downgrades.

Full unedited transcript:

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Let's get more on market action with Morningstar market strategist Lachlan Holloway, who joins me in the studio. So reporting season in the rearview mirror, how would you sort of rate it? Yes. Overall, we'd probably characterize it as balanced and fairly benign. There's always a lot of noise coming and reporting season. But in terms of what we did in terms of fair value estimates that we change, it was about a 1% average upgrade. So it sort of in general wasn't big crazy swings in the market as a whole. We cover most of the markets, so we've got a fairly good sense of it. And you know beats misses broadly balanced out pretty benign. All right. Well let's drill down into that in terms of some of the big themes. Because what I thought was interesting from the retail space we're still spending but consumers are being quite savvy. That's right. So I mean, we've got a few fairly positive trading updates coming out of some of the big retailers at the end of reporting season. So we knew 2024 was going to be a tough one, right. That was fairly well flagged. Slowing revenue growth. Wage cost inflation is not good news for the retail industry, but the first seven weeks of the year when we get those trading updates, that's really where the

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focus was for this reporting season. And broadly speaking, we're seeing some positive signs there. We're expecting retail to pick up over 2025. And the rough sort of indications we're getting early days yet. But for big retailers like JB Hi-Fi, Super Retail Group are that things are picking up. Have you got any thoughts on that Premier investment story we heard today just broke. Have to work through it. I think obviously Premier is a little different because it has a fairly diverse business and also global exposure. I mean we're sort of looking for that rebound in the Australian retailers here. So we'll have to have a look at what premiers. All right. Let's get then into what we saw with the banks as well. Although CBA really the only one to properly report but the others will come through around November. Yeah. Yeah. So I think one of the big stories for us was actually how resilient the Australian borrower still is. So arrears look they're rising. There is some stress in the loan book there. But it's not abnormal in a historical sense. It's still pretty well contained. And and bad debt expense is extremely low. Now you know coming in to this big rate rise tightening cycle, you'd expect there'd be a lot of pressure. But it

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hasn't materialized, probably as as extremely as as we might have expected. That's been a big positive for the banks and also the economy. More broadly. Let's talk about which stock impressed you the most. Yeah. So brambles was a really a really solid result. We like the name coming into reporting season and we still think it looks cheap. We upgraded at about 20%. It's a really strong result. Their margins, uh, expanded really positively ahead of our positive expectations for the name. They're becoming more efficient business. And so we've upgraded and the market like the result to so all around is pretty positive. And where do you think there was some overreaction perhaps from investors. Yeah A2 milk the one we're calling out. So it was in our view sort of a case of the market missing the forest for the trees here. Yet there's some near-term headwinds around their freight issues and some of their manufacturing, uh, bottlenecks. But long term it looks really positive. And the result itself in 24 really strong. You know, they're taking market share too much any way you cut it. So the long term story looks very much intact. Just a few short term headwinds. And that's a company that's very reliant on China as well. How much should you

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sort of look at the outlook and the impact of our biggest trading partner in some of these company results? Yeah, it's very important, particularly for the for the mining sector. I mean that's where it really shows up. 2024 was a pretty good year. I mean, commodity prices broadly were elevated. But now the story is where are we heading? Uh, we think that, you know, despite the fact iron ore, for example, is quite, quite a lot in the last two weeks, $90 a tonne. Now it still has further to fall. We're looking at sort of mid-cycle price around $70 a ton. You know, in the past, China's response to growth slowdown has been to stimulate, to build. And that means increased demand for iron ore for steel production. We don't know how much further that has to go yet. We don't think the future, the future looks like it looks like it blew in the past. So broadly speaking, we're a bit cautious on the outlook there. So when you look at some of those miners, I mean we're just looking there. Fortescue's trading around $16.20. I mean a lot of people had called that iron ore would fall quite significantly, but it seemed like some of those miners were continuing to rally. Is that sort of now a buying opportunity for some of these stocks, or are they at fair value? We see them broadly,

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fairly valued. I mean, there is still potentially a little bit more to come out of them if if our mid-cycle forecast is realized. But basically speaking, you know, they're pretty close to fair value at the moment. All right. Now I think you've got some upgrades and downgrades as well. Right. What are you looking at in terms of some of the upgrades. Yeah. So brambles is the big one that I just mentioned Wisetech too. We upgraded that as well. Again that was a really strong result, a very strong company. And yet another another really strong result for them. We think it looks sort of a little bit cheap. That was the big one there on the sort of a on the on a less positive the side of the of the market ordinate a smaller company. But we downgraded that a bit. We still think it looks really positive. So yeah, there was some sort of issues there as they're transitioning from more of a hardware based business model or software based business model, but we think that's sort of long term. The outlook is really positive there. We cut them, but they still look really cheap. And what about the downgrades then. Yeah. So again I think ordinate Megaport too was a was a pretty soft result. Next year's outlook looks pretty rough. We think it's more around that sort of cyclical short term piece as well. I know the market sort of,

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I think has written off a lot of their growth outlook there, but we still think they have a pretty positive, optimistic future and have significant margin expansion ahead of them. All right. Markets are always forward looking. We're now reacting to US data. I mean, how does the market sort of trade to the world's the end of the year. Have we kind of reached that peak at 8100. And now we're just going to be rangebound? Look, I mean, the way we look at it, we're not so concerned about the very short term trading piece. We try and look at a sort of long term mid-cycle fair value estimate for our our companies under coverage. We think the market is looking broadly fairly valued. I think it's trading at a 1% premium to our numbers now. So it wouldn't be expecting on that basis anything particularly crazy. But again, what the market does in the next three months is, is anyone's guess. We try to provide a long term perspective.