The company reporting season revealed pleasing results for AMCIL, with most holdings in our portfolio matching or exceeding expectations. Portfolio Manager Kieran Kennedy reflects upon the performance of the companies within AMCIL’s portfolio, and the issues confronting them, and shares insights on AMCIL’s approach to changing market conditions.
Whilst company results generally for the first half of the 2022 financial year to 31 December 2021 were sound, they were broadly overshadowed by macro-economic influences such as heightened inflation and fears of hikes in interest rates. This ultimately produced moderating share prices across many companies despite these company results.
Expectations for the first half were high, based on performance in the preceding reporting season in June 2021, where companies generated good margins and dividends that mostly beat expectations as the economy recovered strongly from the impact of COVID. However, although dividends in the more recent period lifted on aggregate, performance in relation to dividends was mixed in some sectors. Some industrial companies narrowly missed expectations on dividends, with a lower level of confidence perhaps restraining payout ratios or market expectations simply being too high.
A major issue currently testing many companies is their supply chains. Previously they have focused on optimising inventory to avoid both gluts and shortages, to maximise cash flow and returns, to now where they are focusing on building up inventories to ensuring they have adequate stocks to meet future customer demand.
Among the stocks that we hold that took this approach, were kitchen appliance supplier Breville Group and automotive components company ARB Corporation which both reported elevated inventory. However, both are quality companies that make in demand products with a long shelf life, so we believe they are in a good position to successfully navigate the current supply chain environment.
Our top performers
In the portfolio, stocks that performed strongly included toll roads operator Transurban, industrial property firm Goodman Group, and digital property settlements platform PEXA Group. PEXA upgraded its prospectus profit guidance on the back of a supportive Australian market and meaningful progress in the new UK market.
One company we recently bought into which also produced a good result, including a strong outlook, is financial platform provider Netwealth Group which is continuing to grow its market share. The market did show some reservations around their near-term profit margins because it is investing more in the business. However, we don’t believe this is a negative and feel Netwealth remains an attractive long-term investment for us.
Other companies where we’ve increased our holdings are Auckland International Airport and Carsales.com, which were very highly priced last year but now look to us to offer better value.
Outlook for the coming year
Given the global uncertainty caused by rising interest rates, inflation, the Ukraine war, and the continuing COVID pandemic, there has been heightened market volatility.
The Ukraine war has caused prices for metals, energy and food to rise and prompted rising inflation. Companies are also grappling with access to skilled workers, and costs may rise as they bid for talent.
However, the more immediate increase in inflation does not mean a significant repositioning of our portfolio. Our belief is quality companies that hold a strong market position are better placed to recover some of those costs as they pass on increased pricing to customers.
All these short-term challenges should ease over time, and returns will again be dependent on fundamental positioning and performance of a business, which is the foundation for building our portfolio.
In terms of total returns, our portfolio has performed well over the last three years. Our approach is consistent: invest in quality companies with good cash flow, good management particularly where they have strong “skin in the game”, and good growth prospects because of their market position. With all this in mind, we look to buy more if the value opportunity is attractive for a long-term investor.