Australian and New Zealand NAPS 3rd quarter review

We are now approaching the home straight for our NAPS (No admin portfolio system) for Australia and New Zealand.

If you wish to revisit the launch blog post of the Australian and New Zealand NAPS portfolio from January, including the selection criteria, please read it here.

To re-read the 1st quarterly update you can do so here

To re-read the 2nd quarterly update you can do so here

As a reminder, the Australia and New Zealand NAPS (No Admin Portfolio System) is run as an education tool and is not intended to be taken as advice or portfolio recommendation. As the name says, we perform absolutely no changes to our very rudimentary selection process, irrespective of how bad a stock may turn throughout the year.

All we do within the portfolio is select the two highest StockRank scores at the start of the year, in each sector, 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 (or personal biases). Rather, this is a shared learning exercise.

As mentioned in the last quarterly review, we 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

General observation

Unfortunately a lot of the work done last quarter was undone this quarter as the NAPS portfolio suffered from some big stock disappointments. However, given the disappointing quarter for the market, it reminded us all of the wonderful contribution dividends make and how they support our total returns.

Performance for 3 months (30 June 23 - 30 September 2023)

* +0.06% gain due to currency conversion of GNE into AUD

Performance for 9 months to 30 June 2023

* -0.01% lost due to currency conversion of GNE into AUD

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.

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

Stock Review

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

The Winners

Coronado Global Resources (ASX:CRN) Current StockRank™ 98. 3mth total gain 27.2%

Coal stocks had suffered heavily for the first six months of the year, therefore they were due for a bounce. As CRN is involved with Metallurgical Coal, it was unsurprising to see their price rebound on account of iron ore prices rallying. After the company’s half year report the Momentum score improved as analysts upgraded their forecast. However Value fell as the expected reduction in earnings hit EV/EBITA and Price to Free Cash Flow. While the news that Seven Global Investments was going to take the 51% majority stake from Energy & Minerals Corp was a positive, the subsequent downgrade after 30 September reminds us that for miners who face falling revenue and rising costs, there is still some work to be done.

Shaver Shop (ASX:SSG) Current StockRank™ 99. 3mth total gain +18.9%

In the last quarterly review we saw our two retail stocks as the most heavily hit on account of rising costs of live pressures. However this reporting period showed us that the consumer remains quite resilient and therefore it was unsurprising to see a relief rally in many retailers, including SSG, particularly over July and August. In the latest annual result, the company exhibited continued revenue, EPS, margin and cash growth, though NPAT did fall. The company also told investors that so far this new financial years, sales were 5% lower than the same time last year which no doubt contributed to the sell down in September. Though overall it retains a high ranking.

Whitehaven Coal (ASX:WHC) Current StockRank™ 98. 3mth total gain 14.9%

In the same way that CRN exhibited a bounce, so too did WHC. Though one would say it was somewhat justified given the fact it was able to achieve record revenues, profit and grow cash on hand. The stock also lifted its dividend and bought back a significant amount of shares (though currently suspended as they seek new opportunities.) The two things however which tempered the price rebound somewhat was the fall in tonnage of Coal Sales and the average cost of sales rising 18% per tonne. The company however expects FY24 to be strong as coal prices hold their own at these levels and the improvements at Narrabri and commencement of mining at Vickery will also contribute positively.

Incitec Pivot (ASX:IPL) Current StockRank™ 83. 3mth total gain +14.6%

Another laggard from last quarter, but amongst the better performers this one was IPL. Notwithstanding that the StockRank actually fell on account of the Quality score falling as the company now has a Piotroski score of 5 (vs 7 previously). Further, Momentum fell significantly as analysts downgraded the stock following the recent update from the business. Within that update the company expressed the challenges it faced with its fertiliser business and the fact that maintenance work had to be moved forward. The company did however say that they remain committed to pursuing a potential sale of the business. The upcoming US Federal Trade Commission’s decision on the approval of the Waggaman sale is also enough to keep investors committed - for now.

Monash IVF (ASX:MVF) Current StockRank™ 89. 3mth total gain +12.8%

Those defensive earnings from MVF provide comfort to investors seeking a safe haven, particularly from the tumult within the broader Healthcare sector. Achieving 11% Revenue growth, 14.7% underlying profit growth and positive commentary surrounding the delivery of new sites, growing market share and global expansion saw the StockRank remain relatively unchanged and price rise. The only blemish was the fall in cash flow, but the company justified that by saying it needed the funds for 5 new sites and payments for acquisitions including the Pivet andART Associates QLD acquisitions.

Hansen Technologies (ASX:HSN) Current StockRank™ 84. 3mth total gain +3.1%

HSN saw a slight improvement of its StockRank in the last 3 months following the release of its annual result. The company is now net cash positive, and though profit growth was relatively flat,the company flagged FY24 guidance of 5-7% revenue growth and +30% underlying EBITDA margin. As previously discussed, one of the advantages of the business is the sticky client base which makes earnings relatively defensive. That said the company has invested in expanding the sales team to try and attain new customers as the emerging technologies of renewable energy and 5G take hold. Though the company said it is constantly on the lookout for acquisitions, it was rather coy as to what is in the pipeline.

Michael Hill International (ASX:MHJ) Current StockRank™ 92. 3mth total gain 3.4%

A big laggard from the previous quarter, though at least able to hold its own this quarter was MHJ. This despite the company reporting and EBIT decline of 6% and drastic fall in cash (though that was due to the Bevilles Jewellers acquisition and further re-investment into the business.) The decline in cash was a reason the valuation metric fell as Price to Free Cash Flow became more expensive. Likewise Quality fell as Return on Capital and Return on Equity retreated. While the company experienced net store closures of the Michael Hill brand, now that they have added Bevilles, their store network has grown to over 300. Though at the time of their FY23 result, they provided a trading update saying revenues, including the 26 new Bevilles stores) were up only 1.2% on the prior year (The company did highlight that last year it started strongly but it faded in the second half of the year.) Margins across the business fell slightly in line with the rising cost of doing business and gold and diamond prices rose globally. MHJ hopes they can command a larger share of consumer wallet with their “Brilliance” membership seeing large uptakes over the year.

Lindsay Australia (ASX:LAU) Current StockRank™ 99. 3mth total gain +1.6%

Still one of the better NAPS stocks thus far, as expected LAU delivered a record result for the full year, achieving 22% increase in revenue, 95% increase in underlying profit and EPS as well as managing to increase its dividend by over 50%. As previously discussed the acquisition of the troubled Scott’s refrigeration logistics business has resulted in LAU becoming the largest refrigerated transport company in Australia. While some investors may have expected a more positive response to the strong numbers, it is important to remember that often much of the positivity is captured before a stock reports as has been the case with LAU. While no formal guidance was provided, it remains optimistic on its ability to continue growing its services and reach.

Data#3 (ASX:DTL) Current StockRank™ 80. 3mth total gain 0.7%

It was a big quarter for DTL who was added to the illustrious ASX200 in September. While this doesn’t guarantee positive performance, it is recognition of the company’s recent performance. Somewhat fitting given founding Board member and Chairman Richard Anderson will step down from the role at the AGM later this month. While over the 3 months the price has hardly moved, it has been particularly tumultuous since the annual result was released. Despite revenue, NPAT and dividends rising the stock fell heavily from $7.50 to $6.10. Such an aggressive sell down would normally suggest that something is very wrong, however beyond ‘expectations’ being missed, these were a solid set of numbers and the stock rebounded, however it now seems to be tailing off. The miss on expectations saw analysts revise the stock down which has pulled back the Momentum score quite significantly. So much so, that it offset the jump in Quality Rank into the high 90’s.

The laggards

Ansell (ASX:ANN) Current StockRank™ 84. 3mth total loss -15.7%

Given the negative performance of the market over the quarter there was always going to be more laggards than winners this quarter. Unfortunately ANN was a laggard from the last quarter and was the worst this time around. We’ve spoken extensively on the continuing cycling off from the extraordinary times of COVID and how their Healthcare customers are still destocking and therefore impacting sales. Further the company did not sound too optimistic with regards to FY24 and the stock was therefore punished on the day. The Stock Rank didn’t change much on account of analyst revisions already being written down on the negative update which was released prior to its report. Price is unlikely to change trajectory until evidence of a resumption of sales growth is underway.

Tabcorp Holdings (ASX:TAH) Current StockRank™ 89. 3mth total loss - 14.0%

Under growing and extreme government scrutiny, the entire gambling sector has faced significant challenges. While we have discussed TAH’s attempt to play the good cop, it certainly didn’t help the price last quarter. The latest result saw a deterioration in each of its factors, mainly Value and Momentum. Unfortunately the modest revenue and EBITDA growth wasn’t enough to sustain its valuation and that has been reelected in the deterioration of Momentum. The company is still growing

Hotel Property Investments (ASX:HPI) Current StockRank™ 92. 3mth total loss -13.1%

We had talked about HPI from the angle of being resilient. Unfortunately though this quarter saw the dam wall break so to speak. When the company released its annual report we learnt that Funds From Operations fell, as did the distribution. While the falling distribution was known, the FFO was a bit of shock. There has also been radio silence on 360 Capital move which saw the fund take a 15% interest in the business back in December last year. Rumors had circled that this would put HPI on the radar for corporate action, however the prolonged silence has seen many walk away. While the current price trades at a discount to NAV of $4.06, the discount is likely because of fears of rising rates and possible negative revaluations, though strength has remained in the property market.

Charter Hall (ASX:CHC) Current StockRank™ 62. 3mth total loss -11.4%

Likewise the dam walls have burst with CHC, though in their case, the price had already been steadily falling. However once it crossed the precipice when combined with the analyst revisions downward, the Momentum score collapsed and as a result, hit the overall StockRank hard. Unlike HPI, CHC as a group trades above NTA, however that reflects the partnership structure it prefers and does not consider the Funds Under Management part of the business, which grew strongly over the year. The company is also bullish on the number of developments in the pipeline. The company has also forecast for FY24 distribution per security to see 6% growth over FY23. Its fortunes will align with that of the broader sector.

Insignia Financial (ASX:IFL) Current StockRank™ 57. 3mth total loss -10.9%

A stock that has lost its mojo since their latest report, and to be fair even well before hand, has been IFL. Revenue, profits and dividend fell, as did underlying net profit (when the discontinued operations of the Australian Executor Trustees business is excluded). Much of the latest result was about the integrating of MLC and the streamlining and simplifying of the business. To me that means, “though we’re not there yet, we’ve got this…” For the portfolio’s sake a bounce in price will do much to aide overall performance even if the stock finishes the year in the red. Though all hope is not lost. Strong fund flows into the asset management business are a shining light. Hopefully performance can hold up its end of the bargain.

Telstra (ASX:TLS) Current StockRank™ 92. 3mth total loss -7.6%

No stock is ever boring, but TLS certainly gave it a good crack. Whether this is a symptom of the stock being so well covered so there is little room for “surprises” I’m not sure. But the latest result was to expectations. In fact the reality was they grew revenues, profit and its dividend. Like 6 months ago, there was not much new to report from the company. The market may have been disappointed by the fact that FY24 guidance was for total income to be flat, which if extrapolated using increasing costs appear that the stock may experience a reduction in profitability. The company remains committed to the objectives of their T25 strategy, which includes an across the board cost cutting program. We can go back to sleep now.

Lycopodium (ASX:LYL) Current StockRank™ 98. 3mth total loss -6.9%

Given the travails of the sector it services, perhaps it was not unsurprising to see LYL experience a slight pullback over the quarter. From a company perspective, its full year performance reaffirmed its Quality and Value, though Momentum suffered on account of the broader sector pullback. At the time of the full year result the company said that given the general outlook and level of committed work, they expect financial performance in FY2024 to continue strongly. They will provide further revenue and profit guidance at the AGM in November.

Genesis Energy (ASX:GNE) Current StockRank ™ 76. 3 mth total loss -5.7%

Power company GNE grew adjusted earnings as the good year for Hydro energy creation saw a substantial fall in costs. Renewable energy made up 65% of the company’s total power generation which was a record since listing. However, one down side of lower traditional Thermal generation was that overall revenue fell, and in kind so did reported profitability. It was also disappointing to see no change in the dividend. While it can be difficult to understand the accounts of a utility business which is heavy in accounting adjustments, in this instance the fall in StockRank was mainly due to analysts downgrading the stock as the company expects more normal trading conditions moving forward. This likewise has seen the price fall which resulted in a fall of the Momentum rank.

McMillan Shakespeare (ASX:MMS) Current StockRank™ 77. 3mth total loss -5.6%

One of the more extraordinary results this earnings season came from MMS who on reporting their full year result saw the share price spike to $22.03, only to see it plummet the next day and still falling since then. On the surface the result looked solid. Normalised revenue and EPS were up, as were novated leases in large part because of the rising uptake in EVs However, scratch deeper and the company saw a big pullback on its Quality score falling from the 90’s into 70’s today. Operating margins weakened, the Piotroski score took a large hit, and cash flow has been hit quite hard as receipts from customers fell while payments to suppliers went up. The subsequent sell off has seen Momentum likewise fall and the stock needs to instill confidence that it has cash burn under control to halt the recent selloff.

Graincorp (ASX:GNC) Current StockRank™ 98. 3mth total loss -5.6%

GNC has been unwinding from a bumper crop in 2022 and unfortunately that has been a drag on price. Total grain handled has fallen, and despite the oilseed operations being on the up, it is clear that this year's harvest will not match last year. Hence why the company is constantly referring to earnings “though the cycle” which is a fancy way to highlight the lumpiness of earnings. The company since its report has kept is cards close to its chest, though it was keen to remind everyone in a recent presentation that they are sitting on a lot of cash and that it has attractive growth opportunities ahead of it, each with strong sustainability angle as per the oilseed crushing facility.

BlueScope Steel (ASX:BSL) Current StockRank™ 98. 3mth total loss -3.7%

Much like every other steel related business, BSL has faced its challenges. It experienced revenue, profit/EPS and ROC/ROE. The latest annual report, while not great, still was close to all time record levels and the results across all divisions were consistent and inline with expectations. What did worry investors was the underlying EBIT forecast in 1H FY2024 is expected to be in the range of $700 million to $770 million, which would imply the company expects to see another fall in profits next year. While the company fell in response, believers point to the continued expansion into the US and sovereign importance here of its Port Kembla operations as reasons to maintain the faith. But with a big capex bill looming as it looks to make Port Kemble more sustainable, it will need a lot to go right to maintain its position.

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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: HSN. This position can and will change at any time without notice.