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Where are fund managers are seeing strength or weakness?

Following the recent corporate reporting season we asked four fund managers to share some of the insights they observed from the reports of companies listed on the Australian Securities Exchange. Specifically, we were interested in finding out if they were observing specific pockets of strength or weakness in the domestic economy. These are their responses…

Healthcare sector a stand out
Don Williams, Chief Investment Officer, Platypus Asset Management

Corporate Australia produced a credible set of numbers given the weakness in the economy following the May budget. Overall reporting season was better than the market expected, both in terms of the numbers delivered and the way the market traded through August. The key thematics we observed were an increased discipline on costs and a commitment to boost cash returns to shareholders. Corporate Australia seems to have finally acted on investor calls to focus on profitability and return more cash to their owners. Dividend growth exceeded earnings growth by a significant margin, supported by a much better cashflow performance. Companies are cutting costs in order to maintain profitability in a poor revenue growth environment. At the start of reporting season expectations for top line growth were 4-5%; the market delivered just 2.2%. Healthcare was the standout sector in our view, with sector leading revenue growth of 13.8%, and record profits for the majority of the established players.

Technology is impacting all businesses
Chris Prunty, Investment Analyst, Ausbil Microcap Fund

The most consistent theme of the last few reporting seasons has been how technology is impacting all businesses and how important a culture of innovation and embracing change is to maintaining competitive advantage. Shorter-term there was clear evidence that the consumer confidence took a hit around the budget but has largely recovered to pre-budget levels. In the Ausbil Microcap Fund we saw strength in globally-facing software businesses such as Altium, Infomedia, GBST, Hansen and 3P Learning and education stocks such as Vocation, Intueri and Ashley Services. With the exception of contract miner MACA, the mining services sector was weak.

Mining services proving controversial
David Allingham, Analyst, Eley Griffiths Group

Reporting season showed that corporate Australia is in relatively good shape. Balance sheets are healthy, funding costs have reduced significantly and capital (both equity and debt) is widely available. There was further evidence that the bottom of the Australian profit cycle is behind us and whilst cheap money has aided the process, it was the bottoming of the profit cycle that formed the backbone of the market’s re-rate over the last 24 months. To date this has been delivered by cost reduction programs with revenue growth confined to building materials, wealth managers, companies with offshore earnings or structural growth stories. Not surprisingly, stocks with these attributes have re-rated the most. One sector that proved controversial was mining services with companies such as Imdex, Ausdrill, Bradken and NRW all suggesting their outlooks were improving, off a low base. This is highly topical, as these stocks do appear to offer significant value, if this outlook proves correct. As a result the sector has performed strongly and there is increasing evidence that the June quarter may mark the low for mining services. However, second half FY14 revenue and margins suggest that there is still downside to consensus earnings which is likely to prevent a sustained rally from these levels. Having said that, we are certainly looking for positive data points (rather than the obvious negatives) that may underpin an investment in the space over the coming months.

NBN roll out presents both a risk and an opportunity
Tim Carleton, Principal and Portfolio Manager, Auscap Asset Management

Expectations for earnings growth appear to be the most subdued in some time. In fact for the first time in a number of years, expectations are for lower earnings growth in FY15 than was actually experienced in FY14. Despite this there are some sectors that are experiencing strong sector wide growth. The telecommunications sector is an example of this. The demand for communication services and data continues to grow quickly with the proliferation of smart devices. This is being reflected in higher revenues and improved profitability. We expect that the revenue pie for all participants continue to outpace broader GDP growth. The rollout of the NBN over the next few years represents both a unique opportunity and a potential risk for most players in the space.

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