Four post-earnings trades in the small cap space

Now that reporting season has passed, the opportunity is here to take stock of how companies reported. This includes what the financial and operational results mean for their future with short-term recent performance occasionally deviating from our overall expectations for the company. In this wire, we examine two companies that performed well after reporting and which we believe should be classed as ‘sells’. Conversely, we look at two companies that suffered but now represent a ‘buy’ for us.

The sells

Kogan.com Ltd (ASX: KGN)

Despite its strong performance after the announcement of half-yearly results, Kogan is a name we would look to sell. The share price of KGN saw a steep increase from 27 February, when it reported, climbing almost 20% over the week with strong operational performance helping the company achieve better-than-expected results. 

The company historically managed its inventory poorly, excessively ramping up its inventory levels during the COVID-19 pandemic period as the company prepared for the peak of e-commerce demand. Ultimately, the company failed to forecast their expected demand within realistic levels.

The half-yearly results indicated that the company was finally starting to recover from its inventory issues. The company reported that it had accelerated the rightsizing of its inventory during the first half, reducing levels by 28.2% to $98.3m from $137m since the end of June 2022. The company benefitted from operational efficiencies, dropping variable costs by almost 40% and fixed costs by almost 10%.

Despite improvements in efficiencies and reduction of inventory levels, the company still reported a 30% decline in gross sales and revenue, reporting a statutory loss after tax. These key metrics reflect a decline in active customers and show significant weakness in its Exclusive Brands and Third-Party Brands sales, which were caused by consumers moving away from online shopping to in-store shopping following the pandemic. 

It very well may have been a characteristic of the overall e-commerce industry. In saying that, these changes didn’t stop competitors such as Amazon Australia from growing their sales during the same period. With expectations that the Australian economy will slow in 2023, we believe KGN could report further decreases in sales and hence KGN currently represents a sell for us.

Mayne Pharma Group Ltd (ASX: MYX)

Next up, we have Mayne Pharma Group Ltd. Despite a +28.5% reaction to the half-yearly earnings report and the announcement that it was selling its US retail generics business, the announcements highlighted risks which, in our view, mean that current holders of the company would be best served to lighten their current exposure in the long-suffering company.

The sale of the US retail generics business follows the sale of its Metrics Contract Services arm, which was arguably by far its most reliable and best-performing segment, streamlining the company further into a speciality US women’s health and dermatology business. These shifts away from its best-performing business segments offer strong potential if MYX’s new management team gets the business shift right. Although, risks remain high. This is particularly given that MYX’s core business is now heavily dependent on the rollout of their NEXTSTELLIS product, which has struggled to enter into a saturated market for a number of years now.

We also take a dim view of the announcement of the cancellation of MYX’s capital return from the proceeds of the Metrics Contract Services business. While this can be seen as prudent capital management on behalf of the company, MYX’s dicey history of managing costs remains a concern to us. In the uncertainty of the current economic environment, we’d have a far stronger preference for a high-quality Health Care name such as CSL Limited (ASX: CSL).

The Buys

Aeris Resources Ltd (ASX: AIS)

Copper miner Aeris Resources is a buy as we follow on from reporting season, with the current share price representing an attractive discount in our eyes. The poor performance of AIS came after the company decreased EBITDA guidance by 38.7%, after producing less copper than expected in the first half of the year. The decrease in copper production was partly due to timing issues, whereby AIS was unable to recognise all the copper produced in the period as it had not yet been processed.

Positively, however, production and cost guidance was maintained for the full year and remains our preferred name in the copper space, with OZ Minerals (ASX: OZL) soon to be acquired by BHP (ASX: BHP). 

The Chinese construction season is about to start and copper is expected to be in a decade-long deficit as the world turns towards decarbonisation. They're strong reasons we believe that the fundamental drivers behind the commodity, and the relative lack of competition in the space, should see AIS quickly stop trading at the 5.7% discount that it is trading to, relative to the last closing price before the company reported. 

The miner has promising projects underway that we believe have the potential to be strong catalysts for the company and should further position AIS to reap the benefits of copper as a critical mineral in the global energy transition.

Mader Group Ltd (ASX: MAD) 

The other company that we believe has suffered harshly from reporting season is Mader Group, with the mining services company trading 6.4% lower since the release of its half-yearly report on 21 February. The fall in company share price came despite earnings reported which broadly beat expectations, while the company also increased revenue and earnings guidance for FY23.

With CapEx spending from major miners expected to strengthen in 2023 compared to 2022, and with MAD currently expanding into the Canadian market faster than we had expected, we see the company extremely well positioned to take advantage of these expectations. Although currency movements represent a degree of risk to the company, our base view is that the rather sticky US inflation will see remaining interest rate hikes be more aggressive in the US compared to Australia, and hence see the USD-AUD pair move in MAD’s favour.

Furthermore, MAD reported better results than the majority of its peers, given its stable contracts. The company has EPS growth potential which is at a significant premium compared to its domestic peers, which in our view justifies the slight PE premium that MAD is currently trading on.

This wire was written by Maqro Capital's Head of Research Julius Zondag and equity research analyst Claire Rich.