Each Friday, we highlight the key trading themes of the week, along with companies and sectors investors should be keeping their eye on.
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Right now, 2022 is being defined by higher inflation and lingering COVID-19 fears.
Will monetary policy rise faster than expected?
While less liquidity and (possibly) higher rates doesn’t mean investors can’t pick winners, it at least raises the possibility of more volatility in the months ahead.
That may also mean less drifting in the gentle current of post-COVID investment waters, and more active analysis of which companies are positioned to navigate the post-COVID transition.
This week, the research team at Barclay Pearce Capital (BPC) put two ASX stocks in the spotlight; one with a Buy rating, and the other labelled Underperform.
Gentrack Group (ASX:GTK)
A New Zealand-based company that provides data management and predictive analytics software services.
Its client suite is largely comprised of infrastructure companies such as utilities and transport hubs such as airports.
Last week, GTK released its annual results for the financial year ended September 30, booking a 5.2% lift in revenues NZ$105.7 million and a similar lift in core earnings (EBITDA) to NZ$12.7m.
That flowed through to a NZ$3.2m net profit, turning around from a loss the previous year.
Shares in GTK climbed as high as $1.88 following the announcement, but BPC are less bullish about its near-term prospects.
With a price target of $1.40, the group has an Underperform rating on the stock, which closed yesterday at $1.79.
That said, the advisory firm still reckons GTK has largely delivered on three strategic growth targets outlined in a company presentation back in June.
GTK’s strategy was based on driving additional revenues through its existing client base, upselling its existing managed services suite, and growing its customer base in the utilities market with a focus on water and energy companies.
While the company said it expects FY22 revenues to be higher than FY21, it stopped short of providing earnings guidance at the release of its full-year results.
"Company operations in 2022 “may be tested due to a turbulent UK energy market and the possible resurgence in COVID-19 with fears the new ‘Omicron’ variant may spread globally”
- Barclay Pearce Capital Research
At its full-year results, Gentrack said the number of B2C energy suppliers in the UK was increasing due to “the global energy crisis and Government enforced price cap”.
Gentrack said it’s still providing support to one of its clients, Bulb, which went into special administration last week.
The company said:
“We anticipate there may be some further supplier failures in the coming winter months after which our expectation is that the market will stabilise.”
Select Harvest (ASX:SHV)
The second company on Barclay’s watchlist, the ~$800m agriculture stock has come under pressure this week, posting six straight losing sessions.
A vertically integrated nut and health food company, SHV is the largest almond grower in Australia and the third-largest in the world.
In its FY21 results, the company posted declines of more than 30% for EBITDA and NPAT compared to the prior year.
The stock has so far failed to climb back to its post-COVID highs above $9, coming close in August before falling again in the wake of an August 30 trading update.
However, BPC thinks the company can return to pre-pandemic growth levels, with a price target of $11.71.
In its assessment, BPC flagged a couple of factors unique to the post-COVID operating environment that weighed on SHV’s performance metrics, starting with a record almond crop out of California.
The resulting supply increase saw the export price of almonds fall to “historic lows” of around $6.80/kg, the firm said.
BPC says:
“SHV was able to offset the hit to top-line growth by successfully initiating cost control measures, along with high crop yields of its own."
That's resulted in “strong sales volumes and margins for the Industrial Value-Add Almonds business, with opportunity for further growth in this area despite lower almond prices”
- Barclay Pearce Capital Research
BPC says:
"Select Harvests is also feeling the effect of the global shipping logjam, which has contributed to a softening in almond prices to between $6.75/kg and $7.25/kg”
In that context, investors should be on the lookout for logistical changes in the New Year, as well as the pending results from the latest crop yields out of California.
BPC says that SHV:
“Anticipates that market pricing is unlikely to change until the size of the current US crop is confirmed and there is a better understanding of the impact of the ongoing California drought.”
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