Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Woolies, Link Admin, Ramsay & Afterpay
Pandemic tailwind to flow into 2021 for Woolies
Woolworths Ltd (ASX:WOW) delivered a weaker than expected result, despite a 6% increase in revenue to $63.6 billion for the financial year. Net profit fell to $1.166 billion with the biggest hit coming from the mothballed Hotels division. Sales revenue improved across the board with Australian and New Zealand Food up 8.3% and 10.5% respectively, behind a sustained increase in people cooking at home once again. Anecdotally, Woolworth’s seems to be my only recurring expense during the economic shutdowns. BIG W’s turnaround continued, growing revenue by 10.5% as consumers flocked to the low cost warehouses, whilst Endeavour Drinks which included Dan Murphy’s added 9.9% with “Dan Murphy’s operating hours” among the most popular google searches during the year. The Hotels division which was in the process of being demerged, now on hold, saw sales fall 19.5% due with most impacts felt after February but now creeping into September in Victoria. Analysts were expected a $1.34 billion profit and dividend of $0.49 cents per share; management declared a slightly lower result, at 48 cents per share. The major highlight was the huge growth in online sales, up 41.8% in volume to $3.5 billion or just 5.5% of total sales; the seamless experience for Victorian’s is likely to see this grow in popularity. The company is also awaiting approval of its $500 million acquisition of PFD Food Services, a distributor and wholesaler of fresh produce.
Comment: Weaker than expected, but defensiveness on show in the dividend.
Operating leverage on show for Afterpay Ltd (ASX:APT)
Having pre-reported its earnings there was little in the way of surprise for Afterpay shareholders, underlying sales up 112% to $11.1 billion, revenue up 103% to $502.7 million and the net transaction margin sitting at 2.3%. Its important to distinguish between underlying sales, which is transactions processed by Afterpay, and revenue or income, which is the fee charged to merchants; the latter being key to profitability. Management indicated that annual transaction growth is currently running at $15 billion, even before recently announced expansions into Canada, Europe and Asia. The company reported a net loss of $22.9 million far better than the $52.4 million expected by analysts, supported by another fall in gross loan losses to 0.9% of their book. Interestingly, just 14% of Afterpay’s income is now sourced for late fees and 86% paid directly by merchants for the pleasure of using their service. The companies incredible growth continues unabated, hitting 9.9 million active users and 55,000 merchants, but barely scratching the surface overseas, where the US now has 5 million customers despite just a few years of operation. Australia remains the core profit centre, delivering $142 million in EBITDA during the year, yet the US’ contribution doubled to 36% and the UK recently reached 5% of sales in a single year of operation; given the European market is estimated to be $300 billion, there is a huge runway of opportunity ahead. Innovation remains at the core of the business with the announcement of the Pulse rewards program, offering more flexible payment options, discounts and other benefits for those who consistently repay on time.
Comment: Another great result, but a difficult company to value.
Time to look ahead for Ramsay Health
Ramsay Healthcare Ltd (ASX:RHC) has borne the brunt of the COVID-19 pandemic with mass shutdowns of elective surgeries hitting what was a strong year to February 2020. The company reported a 43% fall in net profit to $337 million and cancelled their final dividend in light of receiving Government support and undertaking a well-time capital raising; the right decision in the circumstances. Revenue actually increased 7.3% as the European expansion was included in portfolios, but particularly behind strength in their Australian operations, up 2.2% to $5.1 billion. All was on track until February, however, management noted the company was breakeven on an EBIT basis from March until June as the UK, French and Australian Government’s paid for access to their hospital beds. Hidden in the results is a comparison of lockdown approaches across the globe, with the Australian and UK governments offering little support after June, the French Government guarantee support until the end of December and Asia generally not placing a stop on any elective surgeries. The result was a 4.9%decline in UK revenue, but a huge expansion in waiting lists, and a 14.3% increase in European revenue, with Ramsay treating some 7,000 COVID-19 patients thus far.
Comment: Difficult year, but well placed for a boom in surgery and treatment post pandemic.
Another messy result for Link, but PEXA booming
Link Administration Services Ltd (ASX:LNK) delivered another messy result following the loss of a number of contracts in 2019. Revenue finished down 3.1% to $1.23 billion, with a 42% contribution from Europe and the Non-Performing Loans business. Recurring revenue fell just 1% as management were able to extend their contract with HESTA, boding well for other major administration contract wins from the industry super sector. LNK was able to create technology to support unexpected early super release payments in just four weeks and processed $16 billion in payments thus far. They also supported 147 ASX-listed capital raisings totalling $17.8 billion in new equity. Despite this operating earnings fell 17% to $294 million and net profit to $114 million due to an impairment on their Corporate Markets division. This resulted in a lower than expected dividend, 3.5 cents per share, as the company seeks to avoid a discounted capital raising. The PEXA property settlement platform was the biggest highlight, with transaction volumes increase 37% and 75% of all Australian property transactions occurring online. This supported revenue growth of 50% to $156 million and a tenfold increase in operating profit to $53 million; a trend not expected to slow anytime with millions restricted from travel for the foreseeable future.
Comment: Messy result, dividend disappoints but PEXA remains a key growth engine.
