Welcome to Tru Datt, a Stockhead exclusive featuring the insights and opportunities as per Emanuel Datt – founder and chief investment officer at Datt Capital – a Melbourne-based investment manager focused on identifying growth and special situation investments.

In this series, Emanuel talks investment theses, ideas and opportunities from a long-term investment philosophy.

 

The February quarter killing season

The February reporting season has seen a wide range of results.

With stretched valuations and positive investor sentiment, share markets remain at risk of a short term pullback but are still managing to grind higher helped by a combination of mostly okay economic and earnings news, ongoing expectations for rate cuts and enthusiasm for AI.

The AI theme which dominated global markets has had less impact across local markets, says Emanuel.

“The trend in Materials has remained negative while Financials saw only a very minor positive trend in February.

“This reporting season has revealed resilience by ASX companies across various sectors. This is in part led by investors who remain hopeful as the Australian economy continues to be in rude health.”

Local shares are behind for a swag of reasons – one of them being the small IT Sector and the smaller exposure the bourse has to AI opportunities.

But stocks are still benefiting from happier global markets, the improving prospects of an RBA rate cut later this year and an Aussie reporting season which went off without any drama, showed some decent foundations are in place for improved earnings down the track.

There’s certainly signs the RBA’s hefty hikes have done their job.

Aussie gross domestic product (GDP) rose 0.2%, as households held onto their cash and stayed in the house.

Andrew Canobi, director of Fixed Income, Franklin Templeton Investments Australia says inflation looks like its falling faster than the RBA expected as discretionary spending went down another gear alongside investment which slowed after three quarters of growth.

“GDP data shows an economy with barely a pulse,” Andrew says.

The January monthly CPI came in weaker than expected, unemployment has risen to 4.1%, wages sit at 4.2% YoY, and the retail data has bounced a less than expected 1.1% MoM.

“Everyone expects it to be soft but aside from a tiny 0.1% positive in Q3, 2023 household discretionary consumption contracted for every other quarter in the year – even as population grew strongly.

Andrew says the Australian household is “getting squeezed like a lemon.”

“The economy may not be at stall speed yet, but it’s close. The risks to us looking across the US and Australia, is an earlier RBA move than the US.”

 

Emanuel’s ASX earnings standouts

Emanuel Datt, CIO of Datt Capital, says this reporting season revealed resilience from ASX companies across a range of sectors.

“Investors remain hopeful as the Australian economy continues to be in rude health,” he says.

Datt Capital sees pockets of strong growth:

  • Financial services are experiencing lower than expected loss rates on loans across the board as a result of more disciplined origination activities.
  • Insurance companies broadly are benefitting from strong uplift in premiums and modest loss rates.
  • Infrastructure is maintaining stolid performance which is supporting present valuations.

Emanuel says local IT stocks are “a hot sector for M&A” with companies such as Altium (ASX:ALU), Ansarada (ASX:AND) and Whispir (ASX:WSP) receiving recent takeover bids.

“We expect to see more consolidation in this space,” he told Stockhead.

“However, we note that there are isolated pockets of softness particularly in certain resource commodities. In this scenario, our portfolios are long insurers, technology and energy.”

 

ClearView (ASX:CVW)

“CVW is a life insurer that experienced improvements across all its financial metrics; the most important being an 11% increase in gross premiums received.

“The company’s bottom line NPAT margin also increased to 11%.

“ClearView also improved its competitive position capturing 11% of new business written; a disproportionate amount relative to its market share of 4% of the life insurance market.”

Emanuel adds that the company is “simplifying its operations which should work to its benefit”, going forward.

 

Origin Energy (ASX:ORG)

Origin is an integrated Australian energy business which was recently subject to a takeover offer by Brookfield at $9.40.

“Whilst this transaction did not proceed, we believe the latest set of results justifies the rejection of the offer by shareholders. ORG achieved a statutory profit of $995 million for the half year, a cool 250% rise versus PCP.

“All divisions performed very favourably, whilst its 23% equity stake in fast-growing Octopus Energy is worth $2.8 billion in its own right.

“Origin should benefit from Australia’s increasing demand for energy, driven by long-term population trends; and we believe it’s an attractive long-term asset.”

 

Iress (ASX:IRE)

Iress is a financial services technology provider which has experienced significant challenges over the past few years, due to divergence from its core value propositions, according to Datt.

“This has been a painful experience for shareholders however, the latest FY results do demonstrate the strategic initiatives to ‘fix’ the business are beginning to show results.

“The company managed to improve underlying EBITDA by 16% and upgraded guidance for FY24 by 10%.

“Whilst we expect there is still substantial work to do to improve the business, it’s pleasing to see the progress beginning to bear fruit.”

 

Emanuel Datt is the founder and chief investment officer at Datt Capital.

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.

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