Marc Whittaker and Lucas Goode discuss the key themes which emerged from Reporting Season, the performance of IML’s Small-Mid cap portfolios and how they view the future outlook for markets.

Edited transcript

Marc: So here we are at the end of another reporting season across the small and mid-cap parts of the market. Another very volatile reporting season, but pleasingly we had a relatively good performance across our funds. Two dominant themes from my point of view really dictated outcomes in reporting season. The first one was where companies could demonstrate resilience around revenue and margins, we saw share prices very well rewarded. And secondly, where companies could show an improvement in quality in terms of their balance sheets, so getting their gearing down, bringing that leverage down, and where companies could demonstrate some strong cash flow performance. Again, we saw share prices very well rewarded.  On those points, Lucas, in reporting season, what caught your eye?

Lucas: Yeah. I think as you say, Marc, I mean, it feels like I say this every time, but jeez it was volatile. And it seemed as much about positioning heading into results as the results themselves. I mean, you look at consumer discretionary, the market had very low expectations for some of the retailers, just by being less bad than feared with their results. You saw some really big rallies. And then the other side of the coin, some of the more perceived defensive sectors like health care really struggled.

Marc: Yeah. It is an interesting contrast between health care on one hand and consumer discretionary on the other. Where you would have thought the defensive sector would have gone up into the health care, but really consumer discretionary, really outperformed strongly across that period. What stocks, in particular, caught your eye?

Lucas: Yeah. Look, so one I want to highlight, a big holding of ours, we’ve got increased conviction is actually Kelsian, where they were impacted in FY 23 by some higher costs, mostly bus driver shortages in Adelaide, Sydney, and Singapore. Those bus driver shortages are abating. The recent contract wins in Western Sydney, they’re fully staffed up. And most importantly, for the future outlook for the company, the recent acquisition they made in the US, All Aboard America, it looks like an absolute ripper – 40% earnings growth in that division year-on-year in the June half.

Now, Kelsian didn’t own it for the whole half, but obviously from here on out, they will. It gives them a really great platform for growth in the US, and I think it’s, you know, they are doing some really interesting things around electric vehicles, which entrenches their competitive advantage and helps with contract economics. I think it’s safe to say, Marc, that the bus is still rolling.

Marc: Indeed, I think that US acquisition certainly looks very good at this stage. For me GUD holdings was a clear stand out in terms of the companies that we own across the portfolios. The share price up over 20% for the month. But on the back of a very good result, where they demonstrated very good margin and resilience. So that really speaks to their ability to put up prices. So, GUD being one of the leading, automotive aftermarket parts distributors in the country. It’s a great top-line performance, very strong margin performance, and they got the gearing down across their balance sheet.

So one of the concerns the market has had around this stock was the level of gearing, the level of debt on the balance sheet. They sold one of their non-core, or their last non-core operating business, the Davey Water business for a very handsome sum, that helped to get that down to a very acceptable level. And then, they demonstrate a very good cash flow performance. Inventory levels under control, working capital under control, that allowed them to generate a very good cash performance, which again got that gearing down and the market was very pleased to see that outcome. The APG business, which they acquired a couple of years ago, again, demonstrating that it is on track to deliver to expectations into fiscal 2024. So lots to like about that story as well, and I think the team they’re doing a very good job.

Lucas: Totally agree.

Marc: Anything else that caught your eye?

Lucas: Well, moving from auto parts to life insurance, what I want to highlight is a little off the beaten path is Clearview. Small life insurance company that we own that delivered an absolute knock out result.
More than 10% ahead of the guidance that the company had only given a few months previously. New CEO Nadine Goodridge, we really like her strategy. Really like the way she’s executing that strategy. And their share of new business is more than triple their existing share of the back book, you know, which tells you they’re going to keep growing. If they keep executing. The company’s put out some really ambitious, but we think very achievable FY 2026 targets. And most importantly, market is really cheap.

Marc: It does look very cheap, Lucas. That’s our wrap on the reporting season for the small and mid caps. Thank you for joining us.
Interesting, outlook commentary from a lot of corporates. What we found was that most corporates continue to remain cautious, which is very understandable given again the volatility that Lucas referred to at the beginning of the segment. But what we’re looking to do is own quality companies at reasonable prices. And pleasingly, we are continuing to find what we think are very good, very high-quality companies, trying to get very reasonable prices. We’ve got to dig a little bit deeper and a little bit harder on occasion, but we are finding those companies. And we’re looking forward to owning more of those companies over time.


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