Solaris Core Australian Equity Retail (WHT0012AU) Report & Performance

The S&P/ASX 200 Accumulation index delivered 2.9% for July, underperforming global markets as the MSCI World returned 3.3% and in the US, the S&P500 returned 3.1% in USD.

Equity markets were supported by improving commodity prices, with Energy names outperforming on the back of stronger prices with Brent Crude Oil up 14.2%. Further, Iron Ore prices were stable over the month while Gold rebounded from its decline in June, up 2.4% for the month Meanwhile, despite strong employment data, the Reserve Bank of Australia (RBA) left cash rates unchanged at 4.10% but noted further increases may be required.

The top-performing sector for the month was Energy (+8.8%) aided by oil prices, followed by Financials (+4.9%) and Information Technology (+4.5%). The worst-performing sectors were Healthcare (-1.5%), Consumer Staples (-1.0%) and Materials (+1.4%)

The top three performers included Megaport (41.3%), after company management for the networking service business delivered the FY23 result and continued to provide positive guidance for future years. Flight Centre Travel (+22.7%), as the travel company upgraded profit guidance, noting better demand from corporate clients and Costa Group Holdings (+21.7%), the share price of the fresh produce company surged after receiving a bid from a Private Equity firm.

The worst performers were Core Lithium (-28.9%), the most shorted stock in the ASX200, underperformed following an operational update that downgraded production guidance for future years. Lake Resources (-25.0%) continued to underperform following a disappointing management update in June, and further announcement of increased capital expenditure. Syrah Resources (-22.7%) underperformed as the graphite producer keeps production paused due to oversupply and low prices for graphite.

The S&P/ASX 200 Accumulation index delivered 1.0% for the June quarter bringing the index return to 14.8% for the 2023 Financial Year. The local market underperformed the US equity market, as the S&P 500 returned 8.3% in the June quarter and 15.9% for the financial year, driven by ongoing outperformance by technology stocks in the latter half of the period.

The Reserve Bank of Australia (RBA) raised interest rates by 50 basis points during the quarter, bringing the cash rate to 4.10%, and with hawkish commentary and economic data prints not yet indicating a broad economic slowdown, expectations are for further rate hikes to continue.

In terms of commodities, the month of June witnessed a reversal of the 12-month trend; Iron Ore up +8.1% for the month vs -7.1% for the year, Brent Crude Oil up +3.1% but down -34.8% for the year whereas Gold retreated -2.2% for the month but returned +6.2% for the year. The top-performing sector for the quarter was Information Technology (+21.1%) buoyed by the strong performance of global technology stocks, followed by Utilities (+5.5%) and Energy (+3.8%). Conversely, the worst-performing sectors were for the quarter were Healthcare (- 3.2%), Materials (-2.5%), and Consumer Discretionary (-1.7%).

The top three performers included Megaport (+75.2%) after company management for the networking service business announced significant upgrades to earnings for the next two financial years, Telix Pharmaceutical (62.6%) the biotech firm provided a positive quarterly update with increased revenue and demand for their diagnostic imaging agent and Life 360 (+53.8%) which provided a positive Q1 update indicating the growing technology safety company is on track to be cash-flow positive this financial year.

The worst performers were Syrah Resources (-50.7%), who continues to underperform following April’s quarterly business update and subsequent capital raising through a convertible note; Lake Resources (-32.6%) whose share price fell post management update that disappointed due to timing delays and Perseus Mining (-30.7%) following an escalation of armed conflict near their goldmine in Sudan and deferral of their final investment decision.

The S&P/ASX 200 Accumulation index experienced a decline of -2.5% in May, underperforming global equities as the S&P500 delivered +0.2% and the MSCI World delivered -1.25% in local currency. The strength of technology stocks buoyed US equity markets as concerns regarding the US banking sector faded, and focus shifted to artificial intelligence (AI). Notably, NVIDIA, a US tech company, upgraded earnings from AI, and its share price surged over 50%.

The rate-hiking cycle of global central banks continues, with the Reserve Bank of Australia (RBA) increasing by 25 basis points to bring the cash rate to 3.85%. The US Federal Reserve also increased rates by 25 basis points. Meanwhile, commodity prices were under pressure during the month, with Iron Ore down over 4.5%, Oil (WTI) down over 11% and Gold down 1.4%.

Australian technology stocks performed well alongside their US peers, with Information Technology (+11.6%) the clear topperforming sector for the month, followed by Utilities (1.1%) and Energy (+0.2%). Conversely, the worst-performing sectors were Consumer Discretionary (-6.1%), Consumer Staples (-4.6%) and Materials (-4.4%).

The top three performers included Life360 (+34.1%), which provided a positive Q1 update indicating the growing technology safety company is on track to be cash-flow positive this financial year. Lithium miners Lake Resources (+26.2%) and Allkem (+21.2%) also outperformed, with Allkem announcing a merger with US manufacturer, Livent.

The worst performers were Syrah Resources (-26.0%), who continues to underperform following April’s quarterly update and subsequent capital raising through a convertible note; Lovisa (-22.5%), as local and international peers downgraded, impacting the fast fashion jewellery chain and IDP Education (-22.5%) sold off post announcement that their stranglehold in the Canadian market will be opened to competitors, impacting future earnings.

A portfolio holding in focus is Worley, a global provider of project delivery and consulting services to the Energy and Resources industries. Historically, Worley’s business primarily involved consulting services for carbon-intensive industries such as Oil & Gas, Resources, and Chemicals, resulting in earnings that were closely tied to the capex cycles of these companies, making them cyclical in nature. However, as the world undergoes a significant transition toward achieving net-zero emissions, Worley has strategically positioned itself as a leader in sustainability. They are poised to benefit from the increasing investment in energy transition and decarbonization initiatives.

Worley offers a diverse range of services in key areas including Carbon Capture and Storage, Hydrogen, and Wind. Currently, approximately 35% of their revenues are derived from sustainability projects, and they have set an ambitious target of reaching 75% by 2026. This commitment was reaffirmed by management during a recent investor day, where they highlighted the strong outlook and margins for sustainability projects.

Solaris expects continued earnings growth, that is less cyclical in nature given the future investment in decarbonisation by energy and resources companies and given Worley’s position as market and technical leader in this space.

The S&P/ASX 200 Accumulation Index returned 1.85% in April. The Reserve Bank of Australia paused rate hikes as they sought time to assess the lagged impact of the previous ten hikes, despite the strong domestic labour market. Investors viewed the pause as supportive for equities and aided the delivery of a positive return for the market for the month.

Throughout the month, mining companies provided quarterly trading updates, with many proving disappointing, citing challenges on production, weather and costs. Materials was the only sector to deliver a negative return, driven by the quarterly updates. The exception was gold companies that outperformed as gold prices continued to rally.

Real Estate (+5.3%) was the top performing sector for the month as the relief in rate hikes was positive, specifically for companies with residential exposure. Information Technology (+4.7%) and Industrials (+4.5%) were also strong performers.

Conversely, the challenging quarterly updates from miners led Materials (-2.6%) to be the worst-performing sector for the month, followed by Utilities (+1.4%) and Energy (+1.7%). The top three performers included Telix Pharmaceutical (+47.1%), the biotech firm provided a positive quarterly update with increased revenue and increased demand for their diagnostic imaging agent. Megaport (+36.7%) after company management announced significant upgrades to earnings for the next two financial years, and Blackmores (+35.0%) received a takeover bid at a substantial premium, $95, from Japanese company Kirin Holdings.

The worst performers were Syrah Resources (-37.1%), whose share price fell following a disappointing quarterly update and subsequent capital raising through a convertible note; Brainchip (-14.7%), the semiconductor company continues to underperform with full-year results showing another loss. Star Entertainment Group (-11.2%) also underperformed after announcing a downgrade to earnings from challenging operating conditions resulting in a reduction of staff.

The first quarter of 2023 has seen the first cracks of the global rising rate cycle with the collapse of Silicon Valley Bank in the US, and the takeover of Credit Suisse by UBS in Switzerland. The higher bond yields have weighed on equities, but these events were viewed as signs of fragility in the global financial system, and prompted volatility in Australia, with the local markets giving back most of the gains from the strong start to the year, underperforming global equity markets. The S&P/ASX 200 Accumulation index finished the quarter up 3.5%.

Despite the volatility in equity and credit markets, central banks continue to raise rates as inflation continues to print high, albeit declining in Aus. The RBA raised rates for the 9th and 10th consecutive times to bring the official cash rate to 3.6% in Australia, while the Bank of England and the FOMC also raised rates during the period.

The top-performing sectors were Consumer Discretionary (+11.4%), Communication Services (+9.4%) and Information Technology (+8.1%). The worst-performing sectors were Financials (-3.0%), Energy (-1.0%) and Real Estate (+1.2%).

The top three performers for the quarter were all beneficiaries of take-over bids including Liontown Resources (+95.5%), United Malt Group (+36.9%), and Newcrest Mining (+33.0%). Liontown Resources, a lithium exploration and mining company, received a bid from US company Albermarle at a ~65% premium to its share price, which was rejected by the board. United Malt Group received a takeover bid from Malteries Soufflet and entered exclusive due diligence while gold miner, Newcrest Mining, received a non-binding indicative offer from US entity, Newmont Corporation.

The worst performers were Lake Resources (-44.4%), Brainchip (-36.2%) and Megaport (-34.7%). Lake Resources reached 52- week lows and was impacted by the chairman selling, while Brainchip, developer of AI software delivered a disappointing full year result. Megaport’s CEO abruptly resigned, causing the stock to decline 15%.

After a solid start to the year, equity markets pulled back in February as the S&P/ASX 200 Accumulation index returned -2.5%, in line with global markets as the S&P500 returned -2.6% and MSCI World ex Australia -2.4%.

Central banks remained hawkish, and bond markets priced higher rates, with the yield on the U.S. 1yr bond reaching over 5% for the first time in 20 years. The Reserve Bank of Australia raised rates again in February, bringing the Australian cash rate to 3.35%. While the macro environment continues to prove a headwind to equities, the Australian reporting season provided an opportunity for further volatility at the sector and company level, as over 300 companies reported during the month.

At a sector level, the best performers were Utilities (+3.4%), Information Technology (+2.7%) and Industrials (+1.5%). The worst performers were Materials (-6.6%), Financials ex property (-3.2%) and Energy (-0.8%).

At a company level, two of the top three performers were automobile related, including G.U.D. Holdings (+25.3%) on positive half-year results showing auto sales momentum improving, and Eagers Automotive (+19.9%) delivering strong FY22 results and positive guidance for FY23. Link Administration Holdings (+19.3%) outperformed from news flow on a possible resolution to pending FCA regulatory issues and associated fines.

Conversely, Domino’s Pizza (-33.1%) underperformed after delivering a disappointing result and concerns regarding margin pressure. Mining was one of the worst-performing sectors, led by Lake Resources (-23.3%), impacted by a fall in lithium price and Silver Lake Resources (-22.7%) as gold stocks were impacted by rising real yields.

A portfolio holding in focus is Orica, a global Ammonium Nitrate (AN) manufacturer and technology provider operating across Australasia, the Americas, Europe, and Africa. Disruption in the ammonia market from European curtailments has resulted in higher AN prices globally and on the East Coast of Australia. Orica are positioned to benefit, given the favorable industry structure as Orica is generally one of two main players and will be able to pass on higher AN prices to customers. We expect to see a subsequent uptick in sales and profits, and this is further supported by the cost advantage Orica has with supply of lowcost gas on the East Coast of Australia (gas is a feedstock in making AN). Orica’s technology offering is also notable. They are well advanced compared to competitors in their higher margin technology offer. Management have been investing time and capital into broadening their offer which utilizes digital and automated technologies to create safer and more productive blast outcomes for customers. We expect strong earnings growth over the next few years as the benefit of higher AN prices, and a superior technology offering is realized by the focused management team.