Weekly Reports | Aug 23 2024
Weekly Broker Wrap: The results season continues to throw up the hits, misses and misunderstood. Focus on Audinate, BlueScope Steel and Nuix.
-FY25 a consolidation year for Audinate
-Bottom of the earnings cycle for BlueScope Steel
-Nuix, the best Ai play on the ASX?
By Danielle Ecuyer
Quote of the week from John Authers from Bloomberg, a great read if you haven't caught up with John's work.
"Friday, Powell can tie the recent employment and inflation data to the concerns expressed in these minutes. He will be self-congratulatory, note the risks ahead, and assure everyone the Fed will follow the data. No pushback to the market pricing in 100 basis points of ease between now and year-end says that, like a duck on the pond, there is more going on than what they are portraying on the surface."
[Steven Blitz of TS Lombard]
Setting the stage for a return to growth
Audinate Group ((AD8)) shocked the market with its August 6 FY25 guidance downgrade, only to pull what looks to be an earnings rabbit out of the hat at the scheduled release of FY24 results.
The 20% rally in the share price might reflect a short squeeze, but on balance the brokers came away from the announcement with an upbeat tune on the audio/video software company.
Ultimately, the FY24 results presented no surprises, with expected flat FY25 guidance outlook discounted in the share price.
The company is cycling a challenging year-on-year comparison in the 1H25 compared to 51% growth a year earlier, because of normalised supply chains.
Canaccord Genuity raises an important question: are the issues which resulted in the FY25 guidance downgrade "structural or cyclical?"
The broker believes it's the latter, pointing to ongoing strengthening of Audinate's market positioning and increasing network effects.
UBS concurs, highlighting the underlying business has sustained momentum with its Dante-enabled products, including growth in the cloud-based Dante Director. This is believed to offer additional revenues of $120m-$140m p.a. or 5% of group revenue in FY28, Canaccord believes.
Some "choppiness" in FY25 sales might be recorded for Dante products as customers transition through inventory, Macquarie highlights, with new AVIO adapters boosting growth in 2Q & 3Q25.
Management stated earnings growth will return to a "more predictable pattern in FY26" as the company unwinds inventories. Importantly, Audinate expects it can grow at 2-4x market growth in FY26 and beyond which equates to 12%-24% at the gross profit level, UBS notes.
The transition to software is expected to boost the gross margin to 80% with a longer term 85% target remaining in place.
Having overlooked M&A opportunities in the past, the appointment of a new Chief Strategy Officer, who is ex Pro Medicus, is guiding opportunities with $110m available.
In upgrading earnings forecasts, UBS stresses the momentum in video products, 18 added in the 2H24; ongoing audio ecosystem leadership at 4,176 products, which is 12x more than the nearest competitor.
Other positive metrics include 22% growth in trained professionals and 15% growth in OEM (original equipment manufacturers) shipping of developing Dante products.
Canaccord sees the 1H25 as a trough in earnings for one of the ASX's top quality small cap companies with Audinate setting the stage for growth re-emerging in the 2H25 and accelerating into FY26. (Buy rated, $12 target price).
Daily monitored broker UBS queries the valuation and downgrades the stock to Neutral from Buy. (Target price $12.20).
Of the other daily monitored brokers, Macquarie has an Outperform ($14.60 target price) and Morgan Stanley an Overweight rating ($10 target price).
Best in class manages the cyclical
BlueScope Steel's ((BSL)) FY24 results presented a mixed reaction from brokers with Macquarie claiming the company announced better than expected results. Morgan Stanley, on the other end of the spectrum viewed results as a miss on forecasts from both itself and consensus.
The brokers do concur on the lower than anticipated 1H25 guidance from BlueScope with much of the miss emanating from North America, because of an expected -50% decline in the results on 2H24. North Star might come in at around one-third of 2H24 and building & coated products around two-thirds of 2H24.
US spreads remain -14% below late July and -32% below the April highs. Demand is relatively subdued with uncertainty in the lead up to the US election.
The brokers highlight the debottlenecking project at North Star to 300ktpa from 500ktpa at a cost of -US$130m.
Domestically, volumes into the dwelling segment are down -11% year-on-year with management guiding to flat volumes in 1H24 on 2H24. Notably, dwelling approvals have declined -30% from the peak.
On balance, the FNArena daily monitored brokers are looking through the cycle on BlueScope. Dwelling activity has bottomed out in Australia and while a recovery might be slow, there has already been a "meaningful pullback", Macquarie notes.
In North America, capital expenditure has been rejigged, allowing for a more phased approach. Some 275ktpa at an -US$800m cost are being added instead of around 550ktpa at a cost of -US$1.3bn.
Management surprised with a higher than expected 2H24 dividend and a full year payout of 60c from 50c, alongside an $270m buyback extension over the next year.
Net debt has moved to $400m-$800m due to what Macquarie points to as "increased scale and resilience of the portfolio".
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