Growth Investors must exercise Prudence in 2020

Growth Investors must exercise Prudence in 2020

In order to live a life with sufficient amount of wealth, the first requirement is to continue investing. Investment generally means to make money work for you when you do not need the money. When it comes to selecting the class of investments from the sea of investible assets, one is confronted with many alternatives which include shares (Equity), debenture, bonds, currency, Mutual Funds etc. If an investor chooses equity as an investment class, again there is a choice of growth shares or value shares.

Growth Shares

Growth shares pertain to those businesses or companies, which are expected to experience growth at a rate which is sufficiently above the average of the overall market. These types of businesses have tendency to invest their profits back into the business for achieving growth over the medium term. That’s why these are generally not a source of dividends and cannot satisfy the requirements of dividend seeking investors.

Major source of income for investors are capital gains at the time of selling their holdings in these companies. Rewards come with risk taking ability as is experienced by growth investors. If company does not perform well, this would lead an investor to book losses as there is a lack of headroom for dividends.

Moving to some recent trends in the industry, which are affecting performance of the overall market and what investors are required to do:

Some previous trading sessions have been worse for Australian market, the S&P/ASX200 reached below 7000 with a decline of more than 4%. Major sectors which witnessed drop in their market capitalization include retail, aviation, energy etc.

The fall in overall market can be attributed recent bushfire and coronavirus outbreak (COVID-19). These two temporary global events led to decline in demand as well as led the companies to cut guidance for the short to medium term. For aviation sector, this was a trauma, as cross border restrictions on movement have been exercised by the Australian authorities to control the spread of COVID 19.

Let’s us now understand this by taking example of two growth companies from retail and aviation sectors; how these companies have survived and experienced a fall amidst their worse performance in the market.

Blackmores Limited

Blackmores Limited (ASX: BKL) is engaged in the sales and marketing and development of natural health products for humans and animals, which include herbal, vitamins and mineral nutritional supplements.

Decline in Net Profit After Tax

The company recently released its operational and financial performance for the first half of financial year 2020 and highlighted the following:

  • BKL’s reported net profit after tax amounted to $18 million with a steep fall of 47% along with the revenue, which amounted to $303 million, reflecting a decline of 5% as compared to prior corresponding period (pcp).
  • Moreover, it has wrapped up its strategic review during the period. The company has recognized opportunities to focus its strategic effort and investments on fewer, more premium brands in a focused group of markets and channels.
  • With respect to Australia and New Zealand, the company continues to be number one VDS brand in Australia and it continue to take advantage from strong pipeline of new products like new additions to the probiotic range and vitamin C as well as elderberry gummies.
  • Revenue of this segment stood at $115 million with a fall of $29 million or 20% as compared to the previous corresponding period.

The company is expecting revenue for the 2H FY20 to be same of a similar amount as achieved in 1H FY20. Also, it anticipates material impact on the FY20 results from higher costs associated with manufacturing together with the fear of coronavirus.

The Board and new management team of the company is positive and hopeful about the long-term future of BKL even with challenges in 2H FY20.

The stock of BKL closed the day’s trading at $64.20 per share on 28th February 2020, indicating a fall of 3.589% against its previous closing price. The market capitalization of company stood at $1.16 billion as on 28th February 2020. The total outstanding shares of the company at the close of same day stood at 17.4 million. During the time period of three months and six months, the stock of BKL delivered returns of -20.09% and -3.30% respectively.

Qantas Airways Limited

Qantas Airways Limited (ASX: QAN) is engaged in the operation of domestic and international air transportation services; the company officially got listed on Australian Stock Exchange in 1995. The company recently announced that it is aiming off-market buyback of $150 million shares with the record date of participation in the offer of 3rd March 2020.

 

Financial Story of 1H FY20

  • The group-maintained delivery of strong earnings in a mixed market with Underlying Profit Before Tax and Statutory Profit Before Tax amounting to $771 million and $648 million, respectively.
  • Even though cost impacts of $51 million due to higher than estimated foreign exchange rates, impact of $68 million from global freight weakness as well as disruption in Hong Kong, and a $55 million rise in operating costs from the sale of domestic airport terminals, the group reported a fall of $4 million in underlying performance, which was less as compared to 1H FY19.
  • Moreover, the strong performance even with the above-stated factors was supported by capacity discipline, continuing transformation and growing market share in key markets.
  • Return on invested capital of the company stood at 19.6% along with net free cash flow amounting to $213 million.
  • During 1H FY20, Qantas Airways Limited has returned $647 million to shareholders in the form of dividends and an off-market share buy-back. The company declared a fully franked dividend of 13.5 cents per share with a record date of 3rd March 2020 and payable on 9th April 2020.

Impact of Coronavirus

  • During the current torture of coronavirus globally, the company witnessed weakness in demand. Coronavirus led to the suspension of its flights to mainland China and the company is currently expecting some secondary impacts along with weaker demand on Hong Kong, Singapore.
  • The total capacity of the group to Asia would decline by 15% from now to at least the end of May.

For FY20, the company is expecting capacity of the group to decline by 3.8% throughout international and 2.8% in domestic networks. It is expecting transformation benefits to be around $400 million. Qantas is anticipating gross capital expenditure of $2.0 billion for financial year 2020.  The company is anticipating sale of domestic terminals to decline earnings by $100 million, which includes $70 million non-cash.

The company anticipates total negative impact of Coronavirus in the range of $100 million and $150 million in EBIT in 2H FY20.

The stock of QAN closed the day’s trading at $5.530 per share on 28th February 2020, indicating a fall of 1.95% against its previous closing price. The market capitalization of the company stood at $8.41 billion as on 28th February 2020. The total outstanding shares of the company stood at 1.49 billion, and its 52-week low and high is $5.185 and $7.460, respectively. During the span of three months and six months, the stock of QAN delivered returns of -21.99% and -7.08%, respectively.


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