As the market braces for financial-year 2023-24 earnings reporting season, which gets under way in August, it is already widely accepted that positive earnings surprises will be thin on the ground – with the opposite situation far more likely. But here are four situations where the news flow from the companies so far has generally been fairly good; and where a further positive surprise is not out of the question.
- Alliance Aviation (AQZ, $3.04)
Market capitalisation: $489 million
12-month total return: –10.6%
Three-year total return: –11% a year
FY25 expected yield: no dividend expected
Analysts’ consensus target price: $4.62 (Stock Doctor/Refinitiv, four analysts)
Alliance Aviation is a great little airline that you’ve probably never heard of; and is also a mining services stock, providing services to the resources sector. Alliance is Australia’s leading provider of contract, charter and allied aviation and maintenance services. It serves airlines like Qantas and the mining, energy, and government sectors, operating 70 aircraft.
Alliance does not sell tickets: its flights are typically either contracted services on behalf of resource sector customers – flying the fly-in-fly-Out (FIFO) workforce in and out of remote sites – or “wet-lease” flights, where it operates flights on behalf of carriers such as Qantas and Virgin Australia, and provides not only the aircraft, but the crew, to the client. The company has smaller businesses in regular passenger transport (RPT) flight services that it operates on behalf of governments, on routes where major airlines don’t fly, although it is slowly reducing this business; and also ad hoc charter flights, and aviation services. Contract flights generate 51% of revenue, and wet lease 42%.
In both the contract and wet-lease businesses, Alliance usually charges a fixed fee and an hourly rate per flight; regardless of the number of passengers on the flight, Alliance gets paid the same.
Alliance is untypical for an aviation operation in that it owns its entire fleet. At present that fleet consists of 38 Fokker 70/100 aircraft, 43 Embraer E190 aircraft with firm purchase commitments stretching to mid-2026 for a further 21 E190 aircraft. Three of those delivered aircraft have been leased-out.
In May, Alliance reported a trading update that stated that it expects a record pre-tax profit for the result for the year to June 2024, a result that will beat consensus underlying pre-tax profit of $83.9 million, with the result including profit from the sale of five General Electric CF-34-10 engines to a European operator. While analysts are waiting to pick apart the result to see just how much the engines contributed to the profit increase, the core business is also performing well; Alliance has told the market it expects growth of 60%-plus over the FY23 figure, but it would not be a surprise to the profit rise even put that prediction in the shade.
- Universal Store (UNI, $5.75)
Market capitalisation: $441 million
12-month total return: 80.6%
Three-year total return: –4% a year
FY25 expected yield: 4.9%, fully franked (grossed-up, 6.9%)
Analysts’ consensus target price: $5.80 (Stock Doctor/Refinitiv, 12 analysts)
Universal Store is a specialty retailer that focuses on “trend-led and casual” women’s and men’s fashion, shoes, accessories, lifestyle and gifting. The company is a brand aggregator with more than 50 local and international brands, targeting the latest and greatest youth trends: UNI often works with brands to develop exclusive styles and collections to offer its customers, which it describes as the “16 to 35-year-old fashion-focused” person. Some of the brands with which it works in this way include Champion, Tommy Jeans, Kiss Chacey, Barney Cools, Abrand Jeans, Nobody Denim, Wrangler, and Lee.
The company’s principal businesses are Universal Store and CTC, which contains the THRILLS and Worship brands (UNI bought youth fashion retailer, designer and wholesaler Cheap THRILLS Cycles for $50 million in September 2022). At the time, the Byron Bay-based THRILLS was UNI’s highest-selling third-party brand). The company is also rolling out its female youth private brand Perfect Stranger as a standalone retail format. It has been a success: Perfect Stranger is now the largest brand in Universal Store, representing about 16% of sales (excluding standalone Perfect Stranger stores).
At present, UNI operates 102 physical stores across Australia, comprising 80 Universal Store sites, 14 Perfect Stranger sites, and 8 THRILLS stores, in addition to an online store for each of its core brands.
Obviously, in the midst of a cost-of-living crisis, fashion clothing’s nature as the ultimate discretionary purchase should have Universal Store under pressure; but that does not seem to be the case. The company’s sales grew every quarter in the year to June 30, with the fourth quarter being the strongest – and UNI said that momentum continued into July 2024.
Universal Store says total FY24 group sales are expected to come in at $288.5 million, up 9.7% on FY23. UNI has already provided a trading update for FY24 that said earnings before interest and tax (EBIT) was expected to be $46 million—$47 million, which is about 7% above market consensus, and up 15% on FY23. Not many retailers would boast this kind of momentum in the current environment. And the good thing is, there is even room for UNI to surprise further on the upside, when it reports.
In the meantime, there is a very solid fully franked yield predicted by analysts this year, and good scope for total return. The analysts’ consensus target price is yet to incorporate upgrades: broker Morgans, for example, lifted its target price for UNI from $6.50 to $6.95.
- Step One Clothing (STP, $1.705)
Market capitalisation: $316 million
12-month total return: 479%
Three-year total return: n/a
FY25 expected yield: 4.7% fully franked (grossed-up, 6.7%)
Analysts’ consensus target price: $2.25 (Stock Doctor/Refinitiv, one analyst)
Still in apparel, Step One is a leading direct-to-consumer online underwear retailer, through its website www.stepone.life. Step One started as a supplier of men’s underwear and has now added a women’s line as well as a sports line and thermals to its range. The product is made primarily of ethically- sourced bamboo and is designed to maximise comfort and reduce chafing; the products are made in China and Vietnam.
Step One listed in November 2021, at an issue price of $1.53 a share, and opened at $2.70, stretching that to $2.84. It reached $3.00 later that month, but the stock ran into difficulty after that, and traded as low as 24 cents a year after listing. But STP has roared back to life, showing excellent rates of growth of revenue and earnings. In a recent trading update, Step One said it expects to report FY24 revenue of $84 million, up 29%, and earnings before interest, tax, depreciation and amortisation (EBITDA) of $17 million, up 42%. Both figures are well above where analysts expected the business to be.
Step One has done a great job with promotional activity and building brand awareness through FY24, leveraging major promotions around events such as the Midyear and Black Friday Cyber Monday (BFCM) sales. The foreshadowed strong FY24 result could be even stronger than the market expects.
- Jumbo Interactive (JIN, $15.96)
Market capitalisation: $1 billion
12-month total return: 13.5%
Three-year total return: 1.4% a year
FY25 expected yield: 3.9% fully franked ($5.6%, grossed-up)
Analysts’ consensus target price: $16.85 (Stock Doctor/Refinitiv, 10 analysts)
Jumbo Interactive is a digital lottery specialist, with three global businesses:
Lottery retailing: Jumbo is an authorised reseller of Australian digital lottery tickets in Australia and the South Pacific through ozlotteries.com., selling the tickets on behalf of The Lottery Corporation, through the Internet and mobile devices. JIN has a 10-year contract with The Lottery Corporation (TLC) to resell lottery tickets to 2030 (TLC owns the licences.)
Software-as-a-Service (SaaS): Jumbo licenses its ‘Powered by Jumbo’ digital lottery platform as a solution to government and charity lottery operators in Australia and globally. Jumbo distributes lotteries on behalf of Australian charities, including Surf Lifesaving and the RSPCA.
Managed Services: Jumbo provides its lottery platform and lottery management services to charities and worthwhile causes (in Australia, UK and Canada) that want to establish a lottery program, or enhance an existing program, for fund-raising purposes.
As of the FY23 result, lottery retailing generates the lion’s share of revenue, at 77% ($91.3 million), with managed services accounting for 16% ($18.7 million) and SaaS 7% ($8.7 million).
Jumbo is highly leveraged to the big “jackpot” lotteries, Powerball and Oz Lotto, strategically timing its marketing spending to take advantage of the frenzy in ticket sales around big jackpots. The hype of Jackpots remains a significant driver of lottery retailing ticket sales (and revenue); in any given year there is uncertainty as to the exact number and aggregate value of big jackpots.
Jumbo has seen a 20% rise in in total jackpot sales volumes; and with a Powerball price increase of 10 cents a game, and digital share growing, the company is one of the rare consumer-oriented businesses with little in the way of downside risk to revenue in the FY24 result.
Lottery sales are quite stable and predictable over time and are not really subject to economic cyclicality. They do not represent a large proportion of personal budgets, consuming about 0.5% of household discretionary income in Australia. Although near-term sales are affected by the frequency of large jackpots, over time, growth is steady. Jumbo has large addressable markets for SaaS and Managed Services in the UK and Canada – and the USA, too, if Jumbo chooses to take that step.
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