Two standout results from February
At the large end of the market, CSL delivered a standout result during February reporting, and in the mid-cap space Seven Group produced a great result. Here we take a look at their results and highlight a key theme to emerge more broadly during February.
CSL: New products and new applications driving the bottom-line
A key feature of CSL’s result was the positive contribution from a number of new internally developed products and label extensions on existing ones.
This highlights the strength and high returns of CSL’s R&D capability. Newly launched products such as Idelvion and Haegarda are rapidly becoming the standard of care in their respective fields (Haemophilia B/HAE). And there is more to come.
For example, CSL’s well established IVIG products Privigen and Hizentra are midway through gaining necessary approvals to extend their labels to include the treatment of CIDP, one of the largest markets for IVIG and a significant opportunity for CSL to expand its addressable market. These new products are typically also higher margin resulting in additional earnings leverage.
Finally, many investors were sceptical when CSL acquired the Novartis influenza vaccines business a few years ago. However, the merits of the transaction are becoming increasingly apparent. The expanded flu business Seqirus delivered a much stronger than expected first half result and the business is rapidly approaching CSL’s acquisition objectives. Recent data indicates CSL’s cell-based flu vaccines (as opposed to traditional egg based) could also increase efficacy significantly. This may allow Seqirus to grow the industry while also taking market share.
Seven Group: Key drivers of a solid result
Seven Group clearly benefited from a few industry tailwinds but the management team also deserves a lot of credit for delivering strong productivity gains, several value-accretive deals and for overall simplifying the group structure which has reduced the holding company discounts applied by the market to some of its assets.
The result itself was strong across the board – The Westrac (Caterpillar) business is in our view still early in its upswing and should benefit for strong demand for both maintenance parts and new mining equipment as the miners are setting new production records but with ageing equipment.
The acquisition of the 50% of Coates Hire that Seven didn’t already own looks well timed and management in that business has brought a new financial discipline. If it can get the performance anywhere near global companies like United Rentals and Ashtead, which we own in Alphinity’s Global fund, there’s enormous upside.
Finally, as an early backer and active shareholder of Beach Petroleum (with a 26% shareholding) they are in the box seat to benefit from what looks like a great acquisition in Lattice Energy from Origin.
Market still yet to appreciate resource sector as an inflation hedge
The Australian reporting season coincided with increased volatility in global equity markets, largely on the back of heightened inflation fears and rising interest rates. The domestic equity market didn’t escape this market turbulence.
However, the performance and the strong results for many of the cyclically leveraged Resources stocks highlighted that this sector is likely to provide investors a valuable hedge against higher inflation. After all, higher input prices are typically some of the most important factors behind increased cost pressure and ultimately higher inflation.
So while this could be a challenge for markets in general, it should be supportive for resources earnings, which to us at Alphinity, still look underappreciated.
Author: Johan Carlberg, Portfolio Manager