Latest / ausbiz a.m / 21.08.26 with Luke Winchester, Merewether Capital
Transcript
- Andrew: Good morning and welcome to your morning wrap from Ozbiz setting you up for the day on the Australian share market. It is Friday, August the twenty-first, and we're expecting to open lower locally with ASX futures down around three-tenths of a percent. In a moment, we'll preview the day ahead with Luke Winchester. First, though, quick wrap of where global markets finished overnight. And US Treasury yields resume their upward trend. That's despite fresh assur assurances from ⁓ U.S. Treasury Secretary. Scott Bessant of liquidity support for longer dated notes and bonds. And that saw sentiment turn sharply negative, the SP down around eight tenths, the Nasdaq losing one percent, the Dow dropping one and a quarter percent, and consumer discretionary sector, that was the biggest drag. Walmart shares they fell sharply after it missed Wall Street expectations for quarterly comparable sales. Among the commodities, oil prices jumped to the highest level in nearly a month after President Trump. Want of retaliation against ⁓ countries that are supporting Iran, bring crude up around two percent to ninety three dollars a barrel, gold marginally higher at four thousand five hundred and twenty five dollars an ounce. Bitcoin has continued its resurgence to be up another six percent to seventy two and a half thousand US dollars. And the Aussie, it's trading at seventy one point one US cents. Well, let's get across those market moves. And what's ahead? Luke Winchester joining us from Merryweather Capital. Luke, good morning. Luke Winchester: Good morning, Andrew. Great to be here, mate. Andrew: So what did you make of those moves overnight? Obviously taking a bit of a tumble. ⁓ sentiment just a little mixed. ⁓ that ⁓ Treasury intervention didn't last long, did it? Luke Winchester: Yeah, I mean US market's still up around all time highs, but definitely feels fragile. ⁓ you know, the term bond vigil bond vigilantes getting thrown around, which, you know, brings back some memories for people. ⁓ as you said, that intervention, it it it didn't do much, lasted about a day with yields ⁓ get ⁓ resuming their climbs. and again, some fundamentals. I think you touched on it there, Walmart, ⁓ you know, waking up this morning seeing that move. ⁓ it's not a move you expect to see down nine percent in a session for a name like that. ⁓ and it goes to show ⁓ Similar thing we're seeing here in our ASX reporting season, which is just the the squeeze on the consumer starting to come through to some of these businesses that have been pretty resilient so far. ⁓ but now maybe f those those first sign of cracks starting to appear. Andrew: Well, let's get to that then, Luke and ⁓ your impressions of reporting season thus far. Luke Winchester: Yeah, look, I mean, volatile is a word, and it's been that way for the last two or three reporting seasons. I mean, on average, ⁓ you know, I think a a quarter of ASX two hundred names are moving ten percent or more the last few reporting seasons. And ⁓ you know, there's a a few structural reasons why I think we're seeing that volatility, but ⁓ nonetheless, you know, when we're now getting these these catalysts and these events around earnings and and seeing these these big moves. and I think that the consistent themes I'm seeing, ⁓ and it's not too much of a surprise to people, I think. as I said before, looking ahead at at the writing on the wall for some of these businesses, if you're exposed to retail, media, tourism, we know things are tough. We know, you know, some some rate hikes are starting to hit the consumer, cost of living's really starting to hit, inflation is sticky, all of those things that we probably thought we'd see these are impacts, you know, 12, 18 months ago, have really started to come through now. And of course, you know, JB Hi Fi, Premier. ⁓ we'll see a few more coming out today. Accent reporting today, we'll see how they go. the the the good the good ones are are sort of separating themselves, but ⁓ you know, as as the the famous saying, there's no ports in a storm and I think it's a a bit of a storm right now for those consumer exposed stocks. That's the the main theme I'm seeing so far in reporting season. Andrew: What do you regard as the good ones? Then obviously you mentioned JB Hifi, that reported at the beginning of the week. ⁓ you mentioned Accent Group today. We've also got Guzman and Gomez ⁓ today as well. Luke Winchester: Yeah, we'll see Guzman goes. I that's that's a it's a really interesting stock. ⁓ I think we had that one on the call not too long ago and ⁓ I sort of made the point that when you take away the blue sky of the US, it it's hard to sort of justify the multiple being paid. So we'll we'll we'll try them with interest when those numbers come out. ⁓ look, I have to admit I was thoroughly impressed with ⁓ Universal Group yesterday, ⁓ as a as a retailer. It's one that, you know, I've I've consistently sort of I I'm not their target demographic. So I've consistently wondered, you know, where this growth comes from and this this resilience comes from. But Yeah, it it continued keeping on. I I think it was up sort of thirteen, fourteen percent yesterday. I mean JB Hi Fi's numbers were okay, ⁓ you know, just relative to the valuation I think saw saw some weakness there. ⁓ but it's it's it's probably those, you know, for for lack of a better word, those second and third tier retailers we're probably looking on with interest at, you know, your your your shaver shops, your dusks, names like that where they don't have the same sort of footprint scale as some of these other players, you know, h h and and and perhaps more discretionary as well. How how are you gonna sort of fare? Maybe not these reports looking backwards, but certainly I think the market will really be focused on that sort of July to date, August to date trading update. Andrew: Super retail. That was another interesting one yesterday, wasn't it? That that jumped about fifteen percent. Luke Winchester: Yeah, it did. It had a good jump. And I think ⁓ its numbers were mixed. I it always is. It's got those those four segments across, you know, all sort of in that outdoor sports ⁓ thematic. But but it's one of those names where every time it reports it it seems like one brand's, you know, doing well, one brand's sort of struggling and ⁓ the the market never really has a a great read on things. So the valuation's always low. And I think whenever you have low expectations into, you know, an earnings event like that and the numbers are are satisfactory, you you sometimes get those those sort of those violent reactions. I think as well, like ⁓ you know, the other the other theme we're seeing across a lot of these names is ⁓ you know, there's there's a lot more ⁓ shorting activity on the ASX now. So, you know, when when some of these stocks are heavily shorted, ⁓ you know, we've seen that with with names like ⁓ Zip was was heavily shorted and had a violent reaction ⁓ to a catalyst a few months ago. you know, ⁓ Ordinate was was heavily shorted and it's sort of had a good rally post its results as well. I I I think that's that's another thing is ⁓ another factor to take into account that sometimes the headline numbers might just be okay, but you you're gonna get this reaction just because of the dynamics of of the market structure. Andrew: Luke, another notable movie yesterday was IWP education. It it it got smashed. ⁓ look obviously ⁓ saw a steep decline in NPAT. That was down about seventy four percent from from last year. ⁓ obviously concern there, particularly over student placement volumes. Luke Winchester: Yeah, and I think look, this is this is now a a theme, isn't it? ⁓ they obviously had a very weak report last year. That was sort of the the start of this decline. ⁓ and and now it's it's been exacerbated. And I think from a market point of view, you know, one one bad report can be a a blip. Two in a row starts to become, you know, ⁓ something more structural. And you've probably seen that now where you you're not only seeing the fundamentals deteriorate of the business, but also the multiple for. market's willing to pay deteriorate as well. And so combine those two things together and you know you've got a stock down 70, 80% ⁓ well actually from its highs, it it got up to $30 at one point, ⁓ many, many years ago. So ⁓ a big D-rate on that one. And look, it's it's it's it's hard to get enthusiastic about it because it's it's difficult to know where the trajectory of the business is. ⁓ for for me personally and and and I look across ⁓ you know looking across just just ⁓ now at some broker notes and some forecasts ⁓ Given the given the structure of of international students and and the political environment around that, ⁓ I don't think you can model with any confidence that this business bounces back to where it was. ⁓ now, can it recover somewhat? Yeah, yeah, I think that's that's probably likely and and you know, we're we're probably looking at ⁓ the the the the the the the ⁓ the the peak of of this sort of pessimism. but nonetheless I I think it's very difficult to see this business return to where it was just three or four years ago, ⁓ particularly, again without getting too political. ⁓ as I said before, we're we're seeing more and more pushback against ⁓ you know, ⁓ immigration, ⁓ international students and and that sort of thing, which is just a real headwind for these guys 'cause it it effectively is their business in that student placement ⁓ sector. Andrew: Interesting to see what's going on in the local tech sector, making a bit of a comeback. Also biotech. In fact on that front, ⁓ TLX Pharmaceuticals. ⁓ it did well. ⁓ strong gross margin improvement there. What did you make of it? Luke Winchester: Yeah, look, TLIX, really good numbers. It it's always been one for me where ⁓ you know, so much of the valuations in the future with with bringing new new products to market. ⁓ clearly what they've got in in the core business, it's it's you know, a it it it's a fantastic one. ⁓ they've consistently grown now, putting out bumper profits and and re but but reinvesting all that back into, you know, new development and and and and new products. ⁓ so it it's a f come reporting time. I I think it's always difficult because it's hard to know what the market will focus on, whether it will focus on the short term numbers, the longer term outlook. You know, obviously had a hiccup with some some I think it was a phase two trial not too long ago. ⁓ but that was one where again I I s I sort of watched that one from the sideline with interest. It's hard for me to get a good read ⁓ exactly on the on the business and what the market's expecting. ⁓ but obviously a good one for holders yesterday. Andrew: Did you what did you make of Prometheus earlier in the week? ⁓ obviously I mean we was obviously caught up in that ⁓ that SAS pocalypse. Do you feel as though it's resumed its upward trend? Luke Winchester: Yeah, look, and I think what you see with with these sorts of broad sector moves, like when you get a SAS pocalypse and and and the whole sector, you know, was sold off thirty, forty, fifty, some, some even more, is that the market will always come back to the leaders first and and that's prometicus by a country mile. Like you look across the tech sector, th those results the other day were just re you know, reaffirming what we already know. exceptional, you know, compound growth. It it you know, it's been growing at twenty to thirty percent now for for many, many years. maintaining its gross margin, controlling its costs. It's incremental. ⁓ eBit margins are are astounding. You know, 76 to 77 cents of every dollar of revenues now falling to the bottom line. so it's it's yeah, it's it it's the it's the pinnacle of of Aussie Tech. It doesn't surprise me that the market's come back to it. You know, can it capture again go back to what we're talking about with multiples, can it capture the hundred and fifty, two hundred times multiple it had ⁓ a few years ago? I I don't think so. But, you know, it deserves to trade at a really hefty premium to the rest of the sector. ⁓ and you're getting a ton of organic growth where that that those sort of earnings will keep compounding and and continually bringing that multiple down, that that of that future multiple down. So ⁓ that response to the report didn't surprise me. I think it was just a reminder to the market of just how good this business is. Andrew: ⁓ elsewhere in Intake Megaport ⁓ yesterday and zip. Did zip, didn't it? Luke Winchester: Zip zipped, yeah. And again, zip's such a volatile stock. I th I I think it's one we all circle on the calendar because we know regardless of what happens, it's either going to be up or down fifteen to twenty percent. It's just it's just what zip does. ⁓ again, it's a bit like telex where the the numbers, you know, zip's had reports where optically the numbers are coming in very strong ahead of consensus. ⁓ but the market can focus on, you know, ⁓ a sort of different metric that really drives the narrative around the stock. So A couple of reports ago, there was a lot of worries around the bad debts in the US, ⁓ coming in well above sort of where people are expecting. And we're just talking before in the in the intro about Walmart and the American consumer and market maybe worried that, you know, are we starting to see that that American consumer roll over? And what does that mean for zip? ⁓ you know, obviously exposed to ⁓ some some ⁓ you know ⁓ lower socioeconomic customers. But this time around, obviously, yeah, very strong report, very strong outlook as well. I think that's again, it it's always the theme of reporting season. The the market's usually got a good handle on where backward numbers will be. It's always well what what's management seeing into the future and zip put out some some bullish guidance sort of calling for that that that twenty percent growth to continue in their in their EBITDA. ⁓ so yeah, no surprise to see the market like that one. ⁓ Megaport, a very interesting business now. I mean it's pivoted to to almost the the neo cloud ⁓ you know, that we see ⁓ a few listed on the Nasdaq over in the US, ⁓ obviously Fermos in in the private space as well. ⁓ it's it's a pivot that is bringing exceptionally rapid revenue growth. And I think the market is trying to weigh up that revenue growth versus the cost to service that revenue. And and you know the only thing outpacing the revenue growth is their capex growth just because, you know, they are needing to sort of build this business from scratch and and source the source the GPUs, source the ⁓ the the the components and and and get these ⁓ sort of server farms up and running. again, I I think the market sort of stuck in two minds there. ⁓ it had a a wild intraday move yesterday. I think at one point it might have been up sort of high single digits, seven, eight percent, and then swung to a, you know, five or six percent loss, ⁓ sort of I think as as the market digested the the report and and sat on the conference call just because there there's a lot of moving parts to this and I think the main question people are asking is, okay, the demand's there. We know that. We we we see every neo cloud around the country is reporting huge contracted demand. ⁓ but it's do you have the balance sheet and do you have the supply chains to to actually service it? So ⁓ a a wild one. And I think I think Megaport will be, you know, again, one we circle in for future reporting seasons now because it it's gonna be volatile every time. ⁓ there's a lot of moving parts now to that business. Andrew: Luke, great to get your perspective on reporting season. Have a good day. Thanks for joining us in Merriweather Capital. Luke Winchester: You too, mate. Thank you so much. Andrew: And that is your Osbiz morning wrap. Hope you have a great day. I'm Andrew Gagan. Thanks for listening.