The Atlas High Income Property Fund gained by +1.7% during August in a month where all of the Trusts held by the portfolio reported their profit results for the first six months of 2019. Due to our positioning towards higher-yielding rent collectors with recurring income and away from Trusts relying on development profits, the August reporting season provided few surprises.
Over the past year, a new source of volatility has crept into the market – outrageous Trump tweets, often designed to influence ongoing trade negotiations. Atlas believes that trying to manage a portfolio based on expected Trump tweets would surely result in poor outcomes for investors. What we can control is building a portfolio with trusts that are growing their dividends at a rate both greater than inflation. We were pleased to see that the companies owned by the Fund on average grew distributions by 3% compared with the first six months of 2018.
Go to Monthly Newsletters for a more detailed discussion of the listed property market and the fund’s strategy going into 2020.
Earnings wrap: profits, dividends and disappointments
Hugh Dive Sep 2, 2019 — 7.50am
the months of February and August, the majority of Australian listed
companies reveal their profit results, and most provide guidance as to
how they expect their businesses to perform in the coming year.
we regularly meet with companies between reporting periods to gauge how
their businesses are performing, during reporting season companies open
up their closets to enable investors to have a more detailed look at
their financials and ask management probing questions.
happens, investors cannot know with certainty whether skeletons will
jump out or if they will see the expected row of neatly ironed shirts.
In general, company profits have been
better than expected, and in this piece we are going to run through the
key themes that have emerged over the last three weeks.
Show me the money
management was again prevalent and understandably popular with
investors, especially following significant falls in term deposit rates
over the past year. Qantas, AGL Energy, Aurizon, Amcor, Link Admin and
Brambles announced new share buy-back plans.
were announced by the ASX, Suncorp, BHP, Coles and Medibank Private.
Several companies also increased their dividend by a greater rate than
their earnings per share, thus increasing their payout ratio.
Across the industrial companies, the dividend payout ratio remains high and is now approaching 80 per cent.
Spending more than expected
into the August results season we were concerned that company results
would show a dramatic pull-back in retail sales due to falling house
prices and political uncertainty.
The financial results for large listed retail property trusts such as Scentre Group give a good insight into consumer spending.
Scentre’s portfolio of 41 shopping centres and 11,500 retailers, sales
were up 1.3 per cent. Weakness in department stores was offset by sales
growth in food, personal services, supermarkets and even fashion.
in retail, JB Hi-Fi saw sales grow 3.5 per cent as consumers opened
their wallets to buy phones, gaming consoles and Fitbits; similarly,
Tabcorp showed the continued willingness of Australians to bet on horses
and play lotteries.
Coles and Woolworths both showed approximately 3 per cent sales growth in supermarkets and liquor.
The areas where consumer spending was weaker than expected included domestic travel, with Flight Centre
reporting a decline in Australian leisure travel, though this could be
attributed to weakness in the Australian dollar over 2019 which has
reduced the attractiveness of foreign spending.
Coca-Cola also saw declining volumes which may be due to overall diminishing consumer appetites for carbonated soft drinks.
Shorts getting burned
most of the market looks to own stocks that will report a good result
and increase their dividends, some fund managers look to capitalise on
bad results by short selling.
Of the 10 most shorted stocks at the
end of July, only one – A2 Milk – has been profitable for the short
sellers. The two largest short positions – Domino’s Pizza and JB Hi-Fi –
would have been painful shorts as their prices have rallied over
Domino’s Pizza delivered a result that was around market
expectations, with sales in Japan and Europe offsetting weakness in
The last thing a short seller would want to see on
results day is a headline saying that the targeted company has delivered
net profits above their guidance, which is what JB Hi-Fi did last week.
Hi-FI confirmed our view that the company is a world-class electrical
retailer, growing sales and profits against a challenging consumer
As good as it gets for diggers?
The miners (mainly the iron ore producers) reported strong profit growth in August driven by elevated commodity prices.
ore went from $US71 a tonne at the start of 2019 to peak at $US125 a
tonne at the end of June due to the failure of a tailings dam in Brazil
that killed 248 people.
This accident resulted in the miner Vale
shutting down 40 million tonnes of iron ore production, tightening up
the global market for iron ore.
Rio Tinto, BHP and Fortescue
all reported solid growth and increased dividends, but this was
overshadowed by the 30 per cent fall in the iron ore price since the end
of the financial year.
Looking ahead, planned mine expansions
(and resultant increased supply), the impact of trade tensions between
China and the US, as well as a moderating Chinese demand should see the
price of iron ore continue to drift downwards.
calls, management teams from the miners promised to maintain capital
discipline, increase returns to shareholders and pay down debt; all
sound strategies given the weakening of commodity prices.
concerned us was the evidence of rising costs apparent in the results of
BHP, South32 and Rio Tinto. In 2020, the mining companies could face
costs moving higher (particularly labour) at a time when commodity
prices are weakening and demand is diminished.
Hugh Dive is the chief investment officer of Atlas Funds Management.
Short Sellers were caught on the wrong side of the market when Domino’s
Pizza (DMP) and JB Hi-fi (JBH) surprised the market with results better
Hugh Dive from Atlas Funds Management explores the top shorts going into
reporting season and how they have performed in August 2019.
Dive says “Going into reporting season, as a fund manager, it is always
good to look at where other investors are positioned – and in particular
those that have a different view to you”.
In this interview Dive explains how short selling works, the four steps
to shorting and how the “favoured” July shorts have performed in the
August and the dramatic impacts of a Short Squeeze on share prices.
Domino’s Pizza delivered a result that was around market expectations,
with sales in Japan and Europe offsetting weakness in Australia. DMP’s
share price has rallied since the result after management gave a
positive outlook for 2020, telling the market that sales were up close
to 5% over the first 7 trading weeks of the new financial year. The
short thesis for DMP was that further deterioration in Australia would
cause this high PE stock (PE 25x) to de-rate further.
Looking at JBH, when you are short a stock the last thing you would want
to see is the company delivering net profits above their guidance,
which is what JBH did last week. Overall this was a very solid result
from this world-class electrical retailer in a challenging consumer
backdrop. 2020 may look better due to a range factors such as declining
mortgage rates, tax cuts and a higher credit growth (and household
formation from APRA lending changes.