Stocks

A2 Milk shares bucked the sell-off, jumping strongly after delivering a better than expected result for the 2022 financial year given challenging market conditions. Group revenue rose +20% from last year while operating earnings (EBITDA) lifted +47% from last year to $196.2m. Better inventory management saw gross margins normalise (following the previous year’s write-off), while profit growth was limited to increased marketing spending, which appears to continue to rise to achieve modest revenue growth. The surprise was how well China infant formula performed despite macro headwinds as birth-rate in China slumping -11.5% in 2021 and is expected to fall further in 2022 – the decline was partially offset by an increase in household penetration and consumption within the infant formula market. Strong cashflow generation and profitability in the past means A2 Milk is currently sitting on $816.5m cash on hand, with management announcing an on-market share buyback of $150m – was well received by the market.

Shares in data centre operator Next DC (NXT) fell heavily after delivering their 2022 full year result, the selling not helped by a broader tech sell-off for the week. Despite delivering a solid result on the top end of its previous guidance. Revenue rose +18% from last year to $291m and underlying operating earnings (EBITDA) increased +26% to $85m. The company experienced strong growth and ramped it its investment in expanding its installed capacity. Looking ahead, Next DC expects the growth to continue strongly into 2023, with revenue expected to rise +17% to 22% from last year, while operating earnings with grow by +12% to +17% softer than what the market had anticipated given. 

We initiate coverage of Walt Disney Co (DIS) with a BUY rating. The company hardly needs an introduction; its brands are amongst the most well-known in the world, from Mickey Mouse to Marvel and Star Wars. Its empire spans across several sectors — television and movies; sports (ESPN); parks (Disney World) and cruises. The company is a savvy aquirier of valuable assets, including Capital Cities/ABC, Pixar, Star Wars and the bulk of 20th Century Fox. There are few brands which can hold a candle to Disney. In terms of brand value it is perhaps only surpassed by Coca-Cola and Apple. The bulk of the company’s revenue comes from media (~2/3rds) and the remainder from parks and cruises.

Oil and LNG producer Woodside Energy rose to a fresh 3-year higher after announcing a bumper dividend for the first half of the 2022 financial year. Net profit after tax jumped 5-fold to $1,640m, benefiting from higher oil and gas prices (double the same corresponding period last year) and a +19% increase in production volumes which included one full month of production from merged BHP assets. Woodside paid out an interim dividend of US$1.09 per share and now has a strong balance sheet following strong cash generation over the half.

Sky City shares were down when it released its 2022 full-year result, which came in as expected capping off another challenging year greatly impacted by last year’s lockdown. Normalised operating earnings (EBITDA) came in at $138m, while fourth-quarter gaming data showed strong recovery – with fewer operating restrictions. SKC’s balance sheet remains strong against a quality portfolio of assets, with Sky City guiding 2023 operating earnings (EBITDA) to be inline with pre-covid levels ~$300m.

Tourism Holdings (THL) were up after providing upbeat guidance for 2023, as rental demand recovers strongly since the recent reopening of borders and anticipate a major summer rush over the NZ summer. For the 2022 financial year, THL reported a net loss of -$2.1m, a major improvement from the previous year of -$12.4m. Net debt also was healthy at $58.5m, giving the company ~$200m in headroom facility to fund further fleet growth. Tourism Holding guidance net profit after tax for 2023 is expected to be between $17m to $30.2m, and the company did not pay a dividend for the current year and stated a dividend is unlikely for 2023 (Given dividends are conditional on lenders approval) – we anticipate a return in dividend by 2024 to be healthy assuming earnings recover to pre-covid levels.

Pool Corp (NYSE: POOL) is the largest integrated pool business in the U.S with an additional presence in Europe and Canada. It has ~38% market share; the rest of the pool market in the U.S is fractured and competitors command market share in the single digits. Its business model is simple: people who own a pool pay for its maintenance for life, creating a recurring revenue model which makes most of earnings relatively predictable stable.

We reiterate our BUY rating for The TJX Companies Ltd (NYSE: TJX), though we see little near-term upside. The company continues to act as a solid defensive stock which, like other discount/”off-brand” retailers, tends to perform well in a recessionary environment. We are seeing similar movement in the “private” labels of food retailers (see below). In other words: consumers are disregarding “brand” and buying value-orientated products. TJX is poised to do well from this given their off-price model.