Company Interview / What Blackmore is dumping & adding post reporting season

Yu Li from Blackmore Capital notes that the August 2024 reporting period reveals weaknesses across the ASX. The market revises down financial year 2025 EPS by 2.3%, significantly higher than the historical average. Financials perform well, while industrials and commodities face challenges.

Discussing specific stocks, Yu highlights Goodman Group's strong performance, with a 14% EPS growth. Despite market disappointment, Yu remains positive due to Goodman's (ASX:GMG) reliable conservative guidance and growing data centre investments. Another focus is Wisetech, praised for innovation and robust growth in the freight forwarding industry.

Yu comments on Spark New Zealand's (ASX:SPK) disappointing results, leading to a sale, and expresses optimism about Origin Energy's (ASX:ORG) strategic investments and cost management. Origin benefits from a robust cash flow and promising ventures such as the Kraken platform and virtual power plants.

Full unedited transcript:

0:00

Well, getting to the August 2024 reporting period, it did show some notable weakness across the ASX, according to Blackmore Capital. Joining us for more is Julie you, I guess your report card here on what we saw from reporting season.

0:16

Good morning Juliet, good to talk to you again. Um, yes. You're right. There is quite a bit of weakness. And according to one measure, which is how the broader market is receiving the information and how everyone is adjusting what their outlook for the financial year 25 EPs. Now the market is actually revising down for as much as 2.3%. What does that mean in the long sort of according to the history out of, you know, roughly 50 reporting seasons that we have, uh, you're looking at the long term average for that. Revising of the earnings expectation is usually down 0.7%. So it's pretty flat. That means usually analysts before and after reporting season do not change what they think. The next year's earnings growth significantly. But this year there has been a downgrade of 2.3%. So there is quite, quite some weakness in there. And then within that, um, you know, just looking at the performance as well, you think the last few months has been pretty good, but underlying that, there's been some strong kind of differences, for example,

1:16

financials being pretty good and industrials and commodities could be under a bit of pressure. But broadly it's more weak. Yeah. And interesting you talk about the financials one sector that did experience some upgrades. There was that interesting note from UBS earlier this week too about the banks. What are you seeing though in terms of some of the potential stretched valuations when you see the likes of CBA and Macquarie that hit records this week,

1:41

it's always a topical, uh, issue for CBA valuation. I think, um, it is now understood that, you know, Commonwealth Bank is the valuation is high, but particularly compared to other banks that we have as well as international banks. But the other thing that's also going on is we seem to have to accept that it seems to just run that premium all of the time. And just whenever you feel like I want to sell my column, Commonwealth Bank shares, it keeps on going. But this this time reporting season there was actually supported by pretty good result. So there was better than expected name and interest margin but also better cost management. Now on the other side you see the economies. It's demonstrating a slightly different picture because the industrial ones are actually still facing high cost pressure, particularly labor. And in the commodity guys are even worse because they're looking at lower revenue outlook, because the global, you know, demand particularly coming from China, is really weighing on the on the revenue side. So, you know, we got sort of

2:41

financials and materials going this way. And you know it's it's a big call for you to think should I jump to the other. But the valuation of CPI seems to keep going up. And uh, you regret whenever you sell. All right. Well, let's drill into some of the other stocks that you're looking specifically at. Um, data centers, of course, a very hot topic. Goodman Group, um, reporting 14% earnings per share here.

3:05

That's right. It's actually one of the. so despite quite a quite challenging outlook. But I think we saw some opportunities and Goodman is definitely one. They reported 14% EPs growth. Now that's double digit earnings growth. Bottom line growth. Um and this is, you know, higher than what they previously guided of 13% just about a quarter ago. And this is actually higher than what they initially got it of 9%. Now the other thing that we are quite happy with, uh, out of Goodman's results is their guiding 9% EPs growth. So potentially at 25 and you might think, okay, this 9% sounds lower than 14%, but 9% is also what they guide it for. Financial year 20 for one year ago. Um, and what we know and what we see is that the industrial sector, which is a big part of Goodman's earnings, um, it's actually been not growing nearly as much as, you know, financial year, last financial year. So the fact that they're still able to guide that 9% EPs growth and the fact that Goodman almost always got a conservative one at the start and then revised that up every single quarter, or, you know,

4:05

every half year uh, to get the higher EPs growth. Now, the market reacted negatively to Goldman's results, so market was disappointed. But we are not. And in fact I wanted to know this happened exactly. You know the same last year as well. Goodman got in something market is not happy with it because market wants to get that. You know EPs grows the first goal but we will not. And what turns out is it keeps revising up. And now the industrial sector might be slowing. But the other thing that's really kicking up Goodman's growth is data center. They've acted really, really quick. And now you're looking at they're having a pipeline of nearly 40% of data center, and that's trending up to 50%. All of a sudden they now have five gigawatts

4:46

of power available, five gigawatts secured. Now one interesting anecdote is they actually secure the last gigawatt available in Japan. So they're able to jump in that really, really quick and utilize their relationship to be able to secure that high margin data center development work. So we definitely positive on Goodman, particularly when the market is actually, you know, a bit hesitating on that price as well as the conservative guidance. Okay. What about in terms of what we've been seeing with Spark New Zealand? Because I noted that Blackmore sold that after its results.

5:19

That's right. That was uh, that was quite disappointing. We have to say now they reported their EBITDA number lower than the guidance. Uh, but the context behind this actually is a lot more makes this makes this missing guidance a lot more meaningful. They already revised down the guidance early in May. Now that's a month away from June, which is when the result, you know, result number cuts, uh, they already revised down the guidance, put it out to the market early in May. Um, but by June they still missing the guidance. So that tells you that the company is probably really one reckless or doesn't have the competency to actually, you know, sort out that that last month. And the other thing that I think it's quite critical is now spark is a high yielding, you know, companies and you know, shareholders in Australia loves that. Um, the dividend payment is a big chunk for them right now according to what they're guiding for their financial year 25 free cash flow. They don't have enough to even keep the current

6:19

dividend going. So what would happen is they have few options. They can borrow money, or they can revise down their dividend because they won't be able to pay that. So there is a deterioration in their earnings quality. And we've seen that and put a question mark on the management. And this has resulted on selling the stock.

6:35

A stock though that you're quite happy to hold is wisetech sort of the darling, I guess, of Australia's tech scene. If we really have a big tech scene, tell us about what you like here, particularly as it's focusing so much on innovation. That's right. You know product innovation. So they keep on growing. So what they've been doing is they're servicing what this industry called freight forwarding. So freight forwarding industry is the ones that, you know, move the goods from, you know, say and then uh, intermodal on railroads, logistics and all that. So they provide, uh, products, software products to service those industries that actually suffer from very big inefficiencies. What they're doing right now is they're targeting top 25 of the freight forwarders globally, and for each of them, they are rolling out the the product that you're using from website which called cargo wise. So all of those companies, not only, you know, signing big contracts with Usec, but also then themselves because they have global business, they're rolling out that platform and cargo wise

7:35

product in different jurisdictions that they operate. And each iteration of that rollout gives you like extra revenue. On top of that. Was that recently got into a lot more land logistics kind of business and that would provide additional kind of growth factor. And the other highlight, which is what you mentioned from this results, is on result product innovation. They've launched three new products and they all look very impressive in terms of solving that white space, solving that problem that their customers have. Now from those product innovation, a lot higher R&D are being capitalized into, you know, really providing a long, long term growth for the company extremely well managed balance sheet to be able to continue to invest in that product innovation, as well as the current penetration and current product rollout from the existing customers. So all of that together, we are very comfortable with Whiteside being able to continue to gain market share. Now its EBITDA margin is going, you know, to where they target quicker than

8:34

expected. And they're delivering very good bottom line growth in the market which is you know Australia we have a lot less you know, choices in terms of technology stocks unlike us where you got a lot more choices with those. That's actually, you know, making money generating profit. I think Wisetech is a really a high growth and high margin opportunity that we have in the tech sector that we have. Yeah. And just finally, I'm curious about Origin Energy because we're watching very closely what's happening in oil, particularly as it is trading at these levels around 2021. It's already up more than 15% year to date. What do you like about this? Is this it's, you know, decarbonization goals as well?

9:12

That's right. As an incumbent sort of electricity provider it benefits from something that I think not every market participants probably see, we might tend to link it to the oil price. And it does own a bit of, you know, APL ING and gets a lot of cash distribution from that. That's actually a very solid part and very predictable, predictable part of the business. Now, the other two parts of the business, and I think tend to be over undercooked is when the energy market, uh, the energy market business, which is now benefiting from this new platform they have started adopting, which called Kraken. So this platform is aiming to reduce their costs and make it more efficient and engage with customers. For this financial year results, which is, you know, you call it the price performance. Now the market reacted negatively to that. And the reason being there was higher costs than expected. And now we've done our work and we've spoken to the company and we see the temporary nature of those costs, and we see the possibility and conviction the company has to actually still get their cost reduction

10:12

target by financial year 26. And that's a bit of a timing issue there. Now the other part which is actually now adding a bit of growth colour for origin is the 20% investment in Octopus Energy, which is the largest electricity retailer in the UK, which is also how they got the Kraken platform that they can use is by actually this 20% investment in this company. This has been growing successfully in the UK, but what happened during this result is because

10:40

Octopus Energy having to pay a little bit more new energy or renewable energy certificate in the UK to make sure they're providing all renewable energies, and that is sort of a one off cost as well. But this is definitely a growing business, getting a lot of traction in the UK. And as the incumbent electricity provider origin, is investing into things like virtual Power Plan, which allows you to kind of dispatch things, uh, differently and also battery investments. So it's going to be able to produce and provide not only stable coal fired peaking power station, you know, and energy, but also new energy like virtual power plant and battery. So it's going to be in their pocket. So we're positive to that. And then the share price reaction probably provided us an opportunity to actually get a bit more of origin in our portfolio.