Global equities were mostly higher over the past week helped by solid US earnings reports and the US share market made a fresh intraday record high closing marginally below its January high.
Australian shares were dragged lower by weakness in energy and materials shares after results presentations from BHP and Origin Energy disappointed investors.
Long term bond yields were little changed but the recent strength in the US Dollar reversed after China and the US agreed to hold trade talks and Donald Trump commented that he would prefer lower interest rates and a lower US Dollar.
Two of my favoured ASX China growth exposures have recently reported.
A2 Milk (A2M) FY18 result was in line with its pre-guided trading update in July.
Generally all line items were strong, after a record year.
No dividend was declared, but A2M remains in a net cash position, choosing to reinvest in the business.
I was hoping for more clarity and explicit guidance given the wide range of profit outcomes for FY19. A2M has not provided explicit revenue or profit guidance.
Instead flat EBITDA margin guidance of around 30 per cent is generally in line with expectations.
Extra investment in marketing, overheads (China expansion) and one-off new-CEO costs, is tempering margin expansion short term.
With a new incoming CEO, I certainly understand the conservative outlook.
Reviewing the initial commentary it suggests the strategy/outlook is unchanged.
The medium term outlook for A2M remains positive in my view, mostly driven by increasing penetration into new channels in China and the potential to grow the North American business.
The key negative was the expected breakeven in North America pushed out one year to FY21.
The hestitation in having a stronger conviction is the mixed signals on excess inventory in the Australian channel and impact of competition.
Commentary around the new China label launch is progressing well and should alleviate some concerns on inventory.
Management also re-iterated limited impact of new competitors and that this should expand the category growth.
Treasury Wine (TWE) reported a FY18 result in line with consensus.
Cashflow was weaker than expected given inventory build ahead of Americas supply chain changes.
With prior concerns regarding excess inventory averted for the time being and FY19 EBIT guidance of +25pc re-interated, I believe TWE will maintain its premium multiple.
My thesis on TWE is predicated on strong growth in premium wines in the Asian and North American markets.
To date management have sucessfully navigated managing inventory and margins in those regions.
China accounts for around 20 per cent of TWE’s group revenue with the country accounting for around 50pc of the Asian region sales.
I acknowledge Treasury Wines Asian business, and more specifically China, has been the key driver of its PE premium and earnings growth, along with North America which represents around 40pc of group revenue.
All regions grew EBIT with Australia, NZ and Asia particularly strong.
The key drivers remain as we look for margin expansion from mix shift to premium wines.
America’s result was slightly softer given impact of inventory build ahead of distributor changes.
Cash-flow was lower than expectations, even allowing for normalising for inventory build. This is likely to be a focus by the market. Management expect the new USA operating model to be completed in 2H19.
- This article does not take into account the investment objectives, financial situation or particular needs of any particular person. Accordingly, before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser. Christopher Hindmarsh is an adviser at JBWere Limited. JBWere Limited is owned by National Australia Bank Limited.
