Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Chalk and cheese for the ASX recovery trade
Reporting season is over. Impressive earnings and historic earnings beats are just some of the ways to describe it. The rise in earnings was led by the big iron ore producers and the Banks. BHP, RIO and Fortescue Metals (ASX:FMG) all riding on the back of the iron ore boom generating strong free cashflow that delivered material upgrades in dividends.
Asset manager, Blackmore Capital, believes that “earnings resilience, industry leadership and strong balance sheets remain valuable attributes of the portfolio in delivering high quality earnings and dividends. While earnings momentum is expected to slow in the coming quarter, earnings growth is still expected to be in the vicinity of ~10% in FY22, supported by accommodative policy settings and the expectation that higher vaccine rates will ultimately lead to profit momentum returning.”
The team have purchased Bega Cheese (ASX:BGA) and sold out of Westpac (ASX:WBC) to fund the trade.
Prior to its recent results, Bega’s earnings were put under the spotlight after it experienced weakening demand for its primary product, infant formula milk. These came on the back of trade war tariffs, shifts in customer preferences and a weakened Daigou channel with China. Shares fell from a $8.15 high down to low of $3.53. That’s a 57 per cent share price fall. Shares are back up at $5.55.
“Post the acquisition of Vegemite and peanut butter from Mondelez International in 2017 and the transformational acquisition of Lion Dairy and Drinks (LDD) on 25 January 2021, Bega has become one of Australia’s largest food companies,” says Blackmore. BGA was able to grow its branded product sales from 59 per cent to 73 per cent in FY21 with this trend expected to continue into FY22.
Blackmore explains how the Lion Diary and Drinks acquisition was a key driver of returns and margin growth as it added many well-known brands including Dairy Farmers, Daily Juice, Farmers Union, Big M, Dare, Pura, Masters, The Juice Brothers and Berri to its portfolio. It also gave Bega the largest cold chain distribution network.
The asset manager says “BGA is on track to achieve the $36 million cost-out synergy target, and that’s flowing into $41 million of annualized synergy savings. We expect to see double-digit EPS accretion in FY22.”
All in all, the team are positive on Bega which has strong fundamentals and a robust balance sheet after reducing its debt. “Signs of an improvement in global dairy commodity prices and favourable seasonal conditions are supportive of a more positive outlook,” says Blackmore.
Blackmore’s defensive tilt remains, but the company says increasing vaccination rates mean companies that will benefit from the reopening are the ones to look out for.
