Recent changes to the Blended Australian Equities Portfolio & Australian Equities Income Portfolio
Reduced Woolworths Group (WOW)
The grocery stores, Coles and Woolworths, delivered softer than expected 1H19 results. Consensus estimates for their June 2019 profit outlook have been downgraded, reflecting a more subdued retail environment. Subsequently, we have reduced our position in Woolworths following a softer 1H19 sales and net profit result, which delivered only 2% like-for-like growth. Heightened promotional activity, cost inflation and the removal of single-use plastic bags contributed to slower growth. In addition, a weaker than expected result in its liquor business, particularly in Dan Murphy, was also a significant drag on earnings. Big W remains unprofitable, but sales revenue continues to show improvement.
While short term momentum in the grocery sector has clearly slowed in 1H19, Woolworths cash generation and the strength of its balance sheet (post the sale of its petrol business) underpins its commitment to return up to $1.7bn to shareholders in the coming months.
Sold Steadfast Group Ltd (SDF)
We have exited Steadfast Ltd (SDF) following the stock’s strong rebound of more than 20% since its December lows. While the recent 1H19 report showed good organic (+9%) and acquired (+8%) growth in its 18% increase in net profit, we feel that the valuation at 22x FY19 earnings discounts a lot of the growth outlook but leaves little margin of safety. Undoubtedly, SDF has been a beneficiary of a more favourable insurance cycle in recent years. Growth has been supported by rising premiums and tactical acquisitions bringing additional scale and efficiency to the business. We believe the benefits of pricing and acquisition growth are now adequately reflected in SDF’s share price.
In addition, the insurance broking industry has effectively been given three years to resolve issues of conflicted remuneration by the Hayne Royal Commission and while we don’t necessarily believe a draconian regulatory move is likely, there remains the risk of greater regulatory imposts.