Small companies, big swings and four future leaders that stand out

In our reporting season update, I talk to Jason Guthrie about another volatile reporting season in the small to mid-cap end of the ASX. As always there have been many winners and losers and I discuss the trends we are seeing, including margin pressures and a reckoning for some of the best performing companies and sectors of recent months. I also outline the performance of a some of IML’s key holdings including Mayne Pharma (ASX: MYX), oOh!Media (ASX: OML), Integral Diagnostics (ASX: IDX) and Light & Wonder (ASX: LNW).

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Lightly edited transcript – Recorded on 26 February

Jason Guthrie: Hello and welcome to Navigating the Noise, a podcast by Natixis Investment Managers, where we bring you insights from our global collective of experts to help you make better investment decisions. I’m Jason Guthrie, and today I’m joined by Marc Whittaker, portfolio manager at IML, covering the small and mid-cap markets. Marc’s been with the firm for close to 10 years and in the markets for over 25 years. He currently co-manages a number of strategies, including the Future Leaders and Private Portfolio funds.

I’ve been looking forward to this podcast; it’s very timely as we’ll get Marc’s take on reporting season, covering some of the key results across the market, as well as the performance of a number of IML’s key holdings. Marc, it’s great to see you. You’re looking well, and welcome back onto the podcast.

Marc Whittaker: Thanks, Jason. Good to be back on the podcast

Jason: Now, we did hear from Mike O’Neill a few days ago on the large-cap end of things, but it’s a great time to get some views from the team as we find ourselves at the back end of reporting season. I understand the smaller companies tend to report a little bit later, but most of the results are now in. So, how would you sum up the first reporting season of 2025, Marc?

Marc: If I mentioned the word “volatility,” Jason, that would be very appropriate. Like every reporting season, we tend to don the hard hat and put on our body armour, and head into the front lines of reporting season. I think this particular season you could argue has been as volatile as any season. You know, lots of companies—the swings in prices that we’ve seen have been quite dramatic. Often, companies have actually met expectations or even surprised on the upside a little bit, but they’ve been sold down quite aggressively because they haven’t upgraded, or the details in results haven’t quite pleased the market.

So, it’s been very volatile, but I think if we look at the reporting season in totality, the key messages we can take away are that consumers are still fairly price-conscious and value-conscious, but it’s not diabolical in terms of how the consumer is performing. If you look at the revenue lines that many of the companies have reported this reporting season, that’s actually held up OK. Companies are growing their top line or maintaining their revenues pretty well, but it’s really the cost side of the margins where we’ve seen a bit of volatility. We are still seeing some cost inflation or at least elevated costs in some areas of the market.

In this reporting season, healthcare, in particular, has probably seen top lines performing pretty well, but margins have been a little bit disappointing. We’ve seen some dramatic moves in a number of the healthcare names, including some that we own. And then in the outlook statements, most companies have maintained guidance, but in some instances we’ve seen a skew in guidance towards the second half. The first half of where companies have reported have been a little bit light on, and they’ve highlighted that the second half will be a lot stronger. Of course, the market’s a little bit skeptical about those skews from first to second half, and on the basis of that, a few companies have sold off as well.

If we look at small caps for the month, the index is down probably close to 4% or thereabouts, and that probably reflects the volatility that we’re seeing across the reporting season.

Jason: So you mentioned that healthcare has been quite volatile. Certainly, in the large-cap end of town, Mike was mentioning the big banks, which are well overdue for a correction. What are some of the other sectors that have really stood out and caught your eye over the last couple of weeks?

Marc: Yes, I think when we talk about the volatility and the margins and the costs being a little bit under pressure, it’s clearly been the healthcare sector and consumer discretionary, so the retail sector too. As I said, we talked about the top lines being OK, but if you’re a retailer, you’ve probably had to discount a fair bit to get those sales. The gross profit margins for many retailers have been under pressure, resulting in that sector being a little bit under pressure as well.

The IT sector or technology sector has also been quite soft this month. It’s a reversal of what we’ve seen over the last four or five months, where technology has actually outperformed quite well. We’ve seen a bit of a reckoning in some ways this reporting season, which I think is partly due to elevated expectations in that part of the market. The stocks are still performing well but not beating or meeting elevated expectations, and thus being sold off as a result.

On the positive side, from our point of view, the media sector has actually been quite positive. We had Seven West Media (ASX: SWM) report early in the reporting season, and they talked to a TV advertising market that was turning positive for the first time in quite some time. So, there was a bit of an inflection point there, and that’s been followed up by non-entertainment reporting as well. We own oOh!Media (ASX: OML), which is an outdoor advertising business. If you were at a bus shelter and saw those moving or digital advertising boards, that’s most likely to be an oOh!Media asset. They talked about a much stronger outlook, and that’s been one of our better performers this month. The stock has been up very strongly, over 20-30%, and that speaks to a more positive outlook in terms of media.

Additionally, in the telecommunications sector, Aussie Broadband, which we own, had a good result. So, there have been a few good sectors, and there have been a few soft sectors, as you always get with reporting season.

Jason: What about takeover and M&A activity? There’s been a lot of that over the last 18 months or two years, particularly in the small end of the market, which has been great for your funds and performance. Did you have anything in that over the reporting season to highlight?

Marc: Mayne Pharma, (ASX: MYX) which we’ve owned in the portfolio for some time in the healthcare space, so Mayne Pharma is a dermatology and women’s health pharmaceutical company and it received a bid from a US player, Cosette Pharmaceuticals. That was a nice little surprise for us in the reporting season. At the same time, they had a good result as well so their results were well ahead of expectations, so the stock was very strong on the back of that, and then we had the bid announced so that was a doubly nice surprise.

We also had Light & Wonder (ASX: LNW), a gaming company that we own in the mid-caps in our Future Leaders product, which announced it was acquiring a fellow game-developing company in the US. That was well received by the market as well. So, we had M&A on both sides — one a target of M&A and that was a very compelling bid in terms of Mayne Pharma, and Light & Wonder acquiring a company itself, that has also been well received. So M&A does continue unabated in this market, and where valuations make sense, you can see why these bids are coming through despite the fact that the market has had a pretty good run the last little while there’s still plenty of value in the mid-cap space, and it doesn’t surprise us that M&A continues.

Jason: Fantastic. You mentioned being quite volatile in some specific names. Is there anything in your portfolio where you’ve taken the opportunity to build on your conviction and actually add to some positions?

Marc: Integral Diagnostics (ASX: IDX) is a stock that I really like in the healthcare space. It’s the number two or three leading radiology company in the country. It had its result today actually. A little bit soft, unfortunately, the margins, I talked to those costs being an issue. And the market, in its wisdom, has sold the stock down quite materially, so we’ve really jumped in and added to that position.

It’s a good quality company, it’s a short-term hiccup. It’s very hard when you’re looking at companies to look at half by half because often you get movements within a financial year – what you see in the first half doesn’t replicate in the second half. The margin management for that business should be a lot better in the second half.

They’ve had a couple of one-offs and a few miscellaneous items here and there that have impacted the margins, but that should resolve itself. For us, it’s very good buying, and as far as I’m concerned it really talks to the importance of fundamentals and being valuation-driven, and really understanding what you own and where you have a deep understanding and conviction of positions in the portfolio. When they do fall, for whatever reason, it gives you the conviction and the confidence to go and add to that position.

We’ve certainly done that with Integral Diagnostics today, and there are a number of stocks that we’ve added to over the portfolio. We’ve also trimmed a few positions as they have run quite strongly on good results. That’s all about managing the portfolio and ensuring the weights we have in each of our stocks are appropriate.

Jason: Fantastic. I might put you on the spot here a little bit, but with rates moving lower more recently, is now the time for small caps, Marc?

Marc: It’s always a good time for small caps, Jason. But in an environment where rate cuts are more likely than not, I think that always bodes well for small caps, given small caps are really at the cutting edge of the domestic economy. If we think the outlook for the domestic economy is looking to improve — and often that’s the case in the face of rate cuts — that’s great for small caps.

You need to be disciplined, though. Remember that valuations and fundamentals are still important. It’s good to marry the two together: an improving outlook and then stocks and companies that have very good valuations at reasonable prices. That’s where the opportunity will emerge.

It’s a great time to be looking at small caps, but specifically good quality small caps trading at what we think are reasonable prices we think is key.

Jason: We might leave it at that. Thanks for joining us, Marc. There’s always plenty of news and opportunity during reporting season, as we’ve heard today. It’s great to get a quick update and breakdown of some of those key themes and the companies to watch in small and mid-caps.

We’re going to have Marc’s co-PM, Lucas Goode, on the road just after Easter, visiting clients across Australia. So, please do reach out if you’d like to meet in person. I know both Marc and Lucas are very passionate investors, and they love getting in front of clients and investors.

Thank you to all of our listeners today. If you enjoyed the episode, please click follow on your podcast platform and tune in again very soon to hear more from our global collective of experts.

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