Earnings wrap: Super Retail, ASX and Treasury Wine Estates
Positive results across this trio of companies have prompted Morningstar to lift fair value estimates for each of them, but it's not all good news.
Positive results across this trio of companies have prompted Morningstar to lift fair value estimates for each of them, but it's not all good news.
The Australian retail market leader in auto parts, outdoor and sporting goods last week reported $153 million in net profit for fiscal 2020, up 5 per cent year-on-year and broadly in line with Morningstar's forecast.
Following the result, Morningstar equity research director, Johannes Faul increased Super Retail's (ASX: SUL) fair value to $7.70, from $7.50. But this was largely in recognition of an update in his financial modelling of the company's current earnings versus inflation and costs in the future rather than the result itself.
Trading at $9.75 at the market close on Friday, the stock is around 20 per cent overvalued, according to Morningstar.
The no-moat company - whose major brands are Super Cheap Auto, Rebel Sport and BCF Outdoor - has for some time focused on e-commerce trade and reduced investment in physical stores.
"We expect this focus on offering customers an appealing online presence to be instrumental in protecting Super Retail’s market share and operating margins in auto-parts and outdoor retailing, but to a lesser degree in sporting goods, where we anticipate competition to be the most relentless over the next decade," says Faul.
Sports retailer Rebel is the group's second-biggest revenue source – comprising around 40 per cent of total revenue – delivered $94 million in EBIT for FY20 and EBIT margins of 9.2 per cent. This was around 20 basis points lower than Morningstar expected and down on the previous year.
Faul expects competition in sporting goods will continue to intensify: "Not only traditional retailers such as French Decathlon and British JD Sports, but also behemoth Amazon have recently entered the Australian market."
The growth of direct-to-consumer distribution by self-branded stores - both online and bricks-and-mortar - from the likes of Adidas and Nike is also pressuring margins, as Rebel cuts prices to maintain market share.
"Amazon is shaking up the Australian retail landscape in most categories as it builds out its Australian offering, and Super Retail is not immune.
"We expect competition to intensify across all the group’s segments, resulting in price-cutting, lower margins, and greater investment needs in digital channels and in-store service," says Faul.
But he believes the company can prevail by gradually consolidating its physical store numbers as smaller, unprofitable competitors exit due to compressing operating margins.
Supercheap Auto, the group's largest segment – comprising more than half the group total revenue – reported flat earnings before interest and tax margins of 11.6 per cent year-on-year.
Faul believes online competition here is tipped makes material expansion of operating margins or market share gains unlikely in the auto-parts segment.
"The benefit from in-store services that differentiate Supercheap Auto from online pure plays is limited, and easily replicated by incumbent auto-parts retailers Autobarn and Repco," Faul says.
 Full analyst report: Super Retail's Strong Online Performance Key to Maintaining Market Share; FVE Increased to AUD 7.70
ASX Limited
Wide-moat securities exchange company ASX Limited (ASX: ASX) saw a 10 per cent boost to its Morningstar fair value estimate, after posting an 11 per cent year-on-year increase in net profit after tax for fiscal 2020.
The company is still overvalued, despite the fair value boost to $57 from $52, according to Morningstar equity analyst Gareth James. ASX was trading at $84.79 at the market close on Friday - a 48 per cent premium.
ASX's revenue jumped 5 per cent year-on-year, largely due to higher activity in trading of futures and over-the-counter (OTC) derivatives - its largest business, comprising around 35 per cent of group revenue.
But costs rose more than revenue during the year, in percentage terms.
Morningstar equity analyst Gareth James says ASX's reported 11 per cent NPAT growth is "overstated" as a result of its fiscal 2019 adoption of a new accounting standard and a write-down linked to its FY18 investment in external firm Yield Broker.
"Despite the fair value estimate increase, we continue to believe ASX is overvalued.
"We don't believe share price growth has been supported by an improvement in the earnings growth outlook," James says.
He notes the 8 per cent growth in underlying NPAT was related to both an increase in client margins due to increased trading activity, and rising yields in the first half of fiscal 2019.
But James expects the fiscal 2020 interest contribution to be slightly weaker year-on-year, forecasting earnings per share to grow at a compounded annual growth rate of just 4 per cent over the next decade.
 Full analyst report: ASX Fair Value Estimate Increased to AUD 57 Following Strong Result
Treasury Wine Estates
Morningstar lifted its fair value estimate for the premium wine merchant to $12.80 a share, from $12.30, on the back of a 25 per cent in underlying operating income for fiscal 2019 posted late last week.
Revenue growth of 15.5 per cent was in line with the expectations of Morningstar director of equity research for Australia and New Zealand, Adam Fleck.
"Slightly higher long-term margin assumptions lead to our fair value estimate rising … but shares continue to screen as overvalued," he says.
Shares in Treasury (ASX: TWE) were trading at $17.08 at the market close on Friday, 33 per cent above Morningstar's fair value estimate.
Fleck highlights a number of capex investments in fiscal 2020 that he expects will continue to weigh on Treasury's cash reserves.
"Treasury says it will spend up to $135 million in growth capital expenditure this year, acquiring French vineyards in Bordeaux, and expanding winemaking capacity in South Australia, which we estimate will reduce free cash flow by more than 20 per cent versus fiscal 2019’s $284 million," he says.
Fleck doesn't believe Treasury warrants an economic moat given price competition in mid-range wines, limited customer switching costs and the potential for wine industry oversupply.
"But we admit the firms efforts to improve Treasury’s brand management, retailer relationships, and distribution strategy has created substantial shareholder value.
"If we were to assign a narrow moat, our valuation could rise about a dollar per share, to $13.80, as a result of a longer assumed period of positive economic profitability. However, the shares would still be relatively expensive," he says.
 Full analyst report: Treasury Wine Enjoying the Party, but Lofty Share Price Suggests a Hangover to Come
Morningstar reporting season calendar
Morningstar has compiled a list of more than 100 companies that will release earnings results during the August Reporting Season.
We'll update this list daily with links to research notes from our Morningstar equity analyst team.
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