Australian and New Zealand NAPS 1st quarter review

We have our first quarterly NAPS review for the 2023 Calendar year. If you wish to revisit the launch email of the Australian and New Zealand NAPS portfolio from January, including the selection criteria, please read it here.

But just briefly, our Australia and New Zealand NAPS (No Admin Portfolio System) is run as an education tool and not intended to be taken as advice or portfolio recommendation. As the name suggests, we perform no changes to our very rudimentary process of selecting the two highest StockRank scores in each sector, for companies large enough for us to consider.

This update is purely for the purposes of interest. True to word, we will not make any changes, irrespective of any shift in rankings. Rather, as a shared learning exercise let’s see if a passive/stock specific fund can beat the market.

We are measuring the market as the S&P/ASX300, therefore let’s compare ourselves against the total return of the VAS Vanguard Australian Shares Index ETF as that is the closest way we can invest in the top 300.

Remember: Past performance is no indicator of future performance, which in the case of the NAPS portfolio, it will hope the statement rings true.

Performance for 3 months (31 Dec 22 - 31 March 2023)

The NAPS portfolio does not represent the actual return of a financial product. It is used purely for the purposes of education. The performance figure should not be relied upon in any way.

Some stocks were hit quite hard, the victim of short term mistiming which can often occur with a naive portfolio.

We have also seen a number of StockRanks™ fall for a number of different reasons. For some it was an analysis of their latest half year result. Others were because their momentum scores had dropped off on the back of the broad market sell down in mid February to March. For others it was sector reasons beyond business cycle activities which lead to the underperformance. However we have mentioned in other publications in the past that it is expected that the majority of revisions to StockRanks™ are downwards. This is simply because the higher the rank, it has less room to move up and much more room to slide down.

But we are only one quarter in and there are three quarters to play. So armed with our cut oranges and a pep talk, let’s see if we can come back stronger in the second quarter with some of the lagards picking up their socks.

Here is the list of 2023 Australian and NZ NAPS Portfolio inclusions from January and how they currently look now.

Stock Review

We will divide the stocks into winners and laggards, As previously mentioned no changes will be made to the portfolio and this is used solely for the purposes of education.

The Winners

Lycopodium (ASX:LYL) Current StockRank™ 99. 3mth total gain +28.13%

Top of the NAPS for the first quarter was LYL. The stock was already on a strong trajectory prior to its half year where the company provided a further positive outlook on earnings guidance and the company’s expansion plans. At the time the company still had a PE below 10 and high dividend yield, that said, that has changed in recent times as investors apply more value to the company’s per hour EPCM (Engineering, procurement and construction management) first strategy, rather than fixed EPC style contracts, which the company still has available to it but prefers not to use. While not well covered, the analyst who does look over the business recently lifted earning guidance significantly in line with the positive company commentary.

Lindsay Australia (ASX:LAU) Current StockRank™ 98. 3mth total gain +25.11%

LAU actually outperformed LYL from a capital gain perspective. However the higher dividend at LYL saw LAU relegated to second from a total return perspective. At the time of its half year result the company witnessed strong growth in revenues and profit and even saw a reduction in debt on hand. Further operating cash flow returned to a positive trajectory of growth in the latest half. In terms of outlook, the company pushed a positive tone, in particular on the back of the departure of a major player in the refrigerated transport market (Scott’s Refrigerated Logistics). This has seen an unprecedented surge in demand for logistics services for the company. They are confident of delivering an Underlying EBITDA of between $68 million and $71 million in FY23.

BlueScope Steel (ASX:BSL) Current StockRank™ 99. 3mth total gain +21.53%

Despite concerns over the plight of the building materials sector, BSL delivered solid returns for the three months. But it wasn’t all smooth sailing. On the release of its half year report the company flagged a decline in earnings which saw the price fall 10% on the day. Pleasingly an increase in cash on hand allowed it to declare an unchanged dividend. Despite the challenged result, the company was quite upbeat about its prospects, in particular of the North American business where they are growing their US footprint . As formal guidance, the company did say they expect the North Star business to be half of that of the first half and the Building products and Coated Products will see a net weaker result. Investors are currently backing the long-term story and growing resistance of the business model.

Monash IVF (ASX:MVF) Current StockRank™ 91. 3mth total gain +15.10%

The defensive nature of MVF’s earnings saw if find support during the recent volatility. A ‘steady as she goes’ half year report also exhibited pleasing signs. While ARS (Assisted Reproductive Services) volumes were down in NSW and VIC, the result was in line with what the company said at its AGM as it slightly grew revenue. Further, the international business, in particular Singapore, seems to be gaining traction with strong growth witnessed there and the region is expected to be a contributor to growth moving forward. The company’s price has also been supported by constant talk of M&A activity potentially impacting the business as private equity seeks strong cash generative assets.

McMillan Shakespeare (ASX:MMS) Current StockRank™ 97. 3mth total gain +13.08%

A company with a growing order book is MMS who saw a very good result in what was a continued challenging half year. The company was still able to grow EPS and Return on Capital Employed. Further, the stock has been rewarding shareholders in the form of its recent dividend that it was able to raise by 70%. Growth has not only come from the novated and salary packaging side of the business, but also its PSS (Plan and Support Services) business servicing NDIS providers. Further, the company sees government tax incentives for businesses to turn their current car fleets into electric vehicles, will see continued strong demand for their services.

Genesis Energy (ASX:GNE) Current StockRank ™ 95. 3 mth total gain +9.49%

Power company GNE was in the unique position where it actually benefited from the big wet in NZ recently. According to the company at its latest half year result, it said it had taken advantage to generate a record amount of electricity from their hydro power stations. Its heavy focus on energy sustainability is a hallmark of the business. This resulted in a strong result of EBITDAF (earnings before interest, tax, depreciation, amortisation, finance costs) which was up 42% on pcp and NPAT was up 72% to NZ$145.3m. Margins also improved. While there is not much more to say about the business at this point, its ability to ride out the January floods and Cyclone Gabrielle was commendable and a key reason for the recent support in price.

Data#3 (ASX:DTL) Current StockRank™ 83. 3mth total gain +9.42%

It was another record half performance from IT services and solutions provider DTL with all divisions gaining nicely. Contracts with governments and large corporate clients make up the majority of their customers and account for some 65% of total revenue. Pleasingly the company acknowledged that while the global shortage of chips had led to a strong backlog of work on hand boosting future revenue, this continued into the start of FY23 due to an increased volume of business. While the dividend yield is modest given the recent price rise, the elevated payout ratio (circa 90%) suggests they are cognisant of returning strong cash yields to investors.

Telstra (ASX:TLS) Current StockRank™ 87. 3mth total gain +8.59%

TLS continues down the path of its T25 transformation and is quite the different business that many often recall from a darker past. The company has established its siloed businesses who with their dedicated focuses are performing well. Mobiles was a strong division in the latest half and it was interesting to read that the company felt the cyber incident at Optus saw 1H23 net adds in the order of positive low-to-mid ten’s of thousands. The other standout was the International business that did well on account of the Digicel Pacific acquisition that it picked up relatively cheaply with the assistance of government support. This is a large cap with a new bold vision.

The laggards

Whitehaven Coal (ASX:WHC) Current StockRank™ 96. 3mth total loss -23.86%

Markets tend to move between over exuberance and utter despair and the reality is the true value is somewhere in between. Unfortunately for WHC it would appear we caught the cycle on the wrong side of the tips. Though to be fair, the stock has thankfully rebounded from its March low of $6.38, however when you remove the $0.32 dividend, the price pullback has been significant. A raft of government impositions on a number of thermal coal businesses has come on top of wet weather events and the usual social commentary against the demise of coal. But what can’t be denied is that it is dirt cheap (pardon the pun) and it is spitting cash. Contributing to the weakness is a generally held view that a normalisation of thermal coal prices will occur in the years ahead. It will be interesting to see if value players are tempted to take a position in a stock with a PE of 1.9x and a dividend yield of 10%.

Coronado Global Resources (ASX:CRN) Current StockRank™ 99. 3mth total loss -18.13%

While the thematics around metallurgical coal are different to thermal coal, they are often mistakenly painted with the same brush. While newly introduced government royalties are an obvious drag, the company also has US exposure through their Buchanan and Logan projects. One would assume given their current presence, that they will look to spread their exposure away from Curragh and into a more coal friendly jurisdiction. The Chinese price of Coking Coal has seen a sharp pullback in the last quarter and the stock has followed suit. Whilst it is difficult to attribute specific reasons for commodity price moves, reasons attributed include output cuts by steel mills in Tangshan, expectations for a resumption of customs clearance of Australian coal adding to supply, and weak overall steel demand.

Incitec Pivot (ASX:IPL) Current StockRank™ 98. 3mth total loss -16.92%

Despite some positive narratives, IPL experienced a tough 3 month period as fertilizer prices fell and debate raged as to whether they received a fair price for the troubled US ammonia Waggaman facility that it recently sold for $1.68B. However, if fertilizer prices can rebound and be supported by a decision on what to do with those extra funds (possible buy-back) that would definitely help. There is also a potential split of the explosive business which would release further value for investors. The company this quarter has just closed off its books for the March half year, so it will be interesting to see how the company has tracked. Analysts are expecting EPS to have pulled back which no doubt has contributed to recent weakness and seen the Momentum score pullback.

Insignia Financial (ASX:IFL) Current StockRank™ 90. 3mth total loss -14.57%

Amongst the broader market tumult it was not unsurprising to see IFL experience a pull back with the wealth manager having its fortunes closely linked to the market. The company has undertaken a number of roll ups in recent years (including MLC) and its ValueRank metrics are currently what support the weakness in Quality and Momentum scores. Unfortunately the half year result was underwhelming which came at a bad time given markets had turned bearish in the face of inflationary concerns and rising rates. The company reported that underlying net profit was down and the dividend was cut. However the company does have a PE of 10 and dividend yield of 6% despite the recent cut, so IFL is a value play that hopefully will capitalise from the synergy benefits recent acquisitions can bring it.

Hansen Technologies (ASX:HSN) Current StockRank™ 79. 3mth total loss -9.33%

Billing software provider to the utility sector, HSN has a client base which is sticky, losing no customers in the first half of the year. That said, their report underwhelmed with flat revenue and falling EPS. The dividend however was maintained and net debt came down, but the market was obviously hoping for more. The company is focused on trying to achieve that with much of the commentary surrounding the topic of looking for suitable acquisitions to provide a much needed boost. Despite the low net debt and good gross cash flow generation, single digit revenue growth expectations means that investors will have to be satisfied with returns similar to the utility companies they service. HSN was also the stock that experienced the largest drop in StockRank ™ following their report.

Charter Hall (ASX:CHC) Current StockRank™ 96. 3mth total loss -8.36%

Rising rate environments are never good for REITs. Whether it be for their underlying debt repayments, or their perceived status as a bond proxy. When rates rise, these stocks tend to underperform. Especially ones where they were previously priced for their high calibre as CHC was. Despite rising property valuations and growing funds under administration, when you forecast for distribution growth of just 6% on a yield at the time of 2.8% it was always going to be tough to get investors to focus on its strong operational performance. Despite the pullback, it is still one of the more expensive REITs out there. However for its Quality, this will not be a surprise.

Graincorp (ASX:GNC) Current StockRank™ 99. 3mth total loss -7.06%

GNC has been a beneficiary of a bumper last harvest, with another expected to come this summer. This, along with continued strong prices and high demand for Australian wheat, have not been enough to hold the stock price up. Whilst it is true that rail and road bottlenecks are holding back export levels, the fact remains that recently the company reported that it had passed the 10 million tonne milestone for grain delivered to its east coast network and there is more to come. With a low PE, strong profitability and good dividend it is no surprise that the stock rates highly on Quality and Value metrics. A turn in Momentum has the potential to see the company make another run at all-time highs seen last year.

Michael Hill International (ASX:MHJ) Current StockRank™ 96. 3mth total loss -7.00%

At the cold front of discretionary consumer spending is Jewellery and MHJ. Following a run of rate rises in Australia and New Zealand, it is not unsurprising to see sentiment shift away from the business. This despite it delivering a robust half year report where it delivered growth in revenue, margins and dividend. What however was disappointing was the sluggish result from the Canada business. Still in its infancy, there was a hope that it would carry more of the growth load from a more mature Aus & NZ market. Also the company’s guidance statement didn’t instil the same level of confidence from investors relative to peers. The company will look to leverage off its growing loyalty program and new revenue streams to drive growth.

Tabcorp Holdings (ASX:TAH) Current StockRank™ 99. 3mth total loss -5.90%

While many Sports Betting companies are struggling at the minute, one bucking the trend is TAH. The Company reported 1H23 NPAT of $52m and a fully franked interim dividend of 1.3 cents per share. The standout of the result was definitely the growth in digital revenue market share to 25.1%. Often lagging behind competitors, the company seems to have finally capitalised on the delivery of the TAB App and its strong brand recognition. The company’s TAB25 vision sees it target 30% digital revenue market share by 2025. Recent state government imposition of taxes on Corporate Bookmakers has brought many of the company’s competitors back to the field, with TAH aiming to play a voice of reason role in a sector under much scrutiny.

Ansell (ASX:ANN) Current StockRank™ 86. 3mth total loss -5.21%

PPE Manufacturer ANN continues to cycle off the unusual events of the past few years. Whilst sales in the second half of their financial year improved relative to the first half, The company is managing a range of issues from supply gluts, to labour concerns and cheap competitor products. At the recent AGM it highlighted that some of the larger industrial and life science distributors in Europe and the US were implementing plans to reduce their inventory levels for ANN’s Single Use styles and life science portfolio. This has reduced orders for these product segments. But after having fallen significantly over the past two years, much of this was already priced in. Hence why the price has remained somewhat stable.

Hotel Property Investments (ASX:HPI) Current StockRank™ 98. 3mth total loss -4.68%

While the broader REIT sector has suffered weakness across the board, one stock that has proven quite resilient is HPI. Not only because their portfolio of pub and leisure outlets in the current environment have held up quite well. But also because the trust is under takeover speculation, not only from companies such as CHC (which also has Pub assets) but also Tony Pitt’s 360 Capital. M&A activity aside, the latest half year result showed that the REIT trades below NTA, despite growing revenues and distributions. With the weighted average lease expiry currently at over 10 years and with 71% of leases referencing CPI, the company will continue to be a focus for those interested in the sector.

Shaver Shop (ASX:SSG) Current StockRank™ 96. 3mth total loss -4.30%

COVID, is often championed as the making of the personal care retail outlet SSG into an online shopping success. However approximately 75% of sales is actually achieved in-store, showing the bricks and mortar part of the business remains important. The company is still cycling off the boom times during COVID with the company often quoting comparable sales figures to pre-COVID periods. The latest half year saw gross margins actually improve for the company during a period of rising costs. However, beyond this “profit maximising strategy” it needs to focus on the top line as the first two months of the second half of the year were down on previous and investors will no doubt be keen to hear of the company’s plans soon.

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Information in this commentary is current as at date prepared unless otherwise stated. However, please bear in mind that investments can go up or down in value, and that past performance is not a reliable indicator of future performance. For more Important Information please refer to the Disclaimer section of this website.

This communication may contain general financial product advice. It has been prepared without taking into account your personal circumstances, and you should therefore consider its appropriateness in light of your objectives, financial circumstances and needs before acting on it.

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The author hold interests in the following stocks mentioned in this article: IPL, TLS. This position can and will change at any time without notice.