April 2022 Investment Report

May 19, 2022
Investment Updates

In recent years many investors (not us!) were just focused on companies that were growing revenues. They would tell CEO’s to just get revenues up; through taking on as many customers as possible, at any price or through acquisition. The talk was all about potential market share of the total addressable market (TAM). How many times did we hear that? At the time the market was valuing the highest growth companies on revenue multiples. Now the same CEO’s are being told to get EBIT up. But it’s not that easy. Sales volumes are important to investors as a forward-looking indicator but companies are finding that by putting prices up or closing revenue leakage loopholes (eg: multiple households using the same Netflix account) they are now losing customers. Making EBIT is never as easy as generating revenue. At the same time, the equity market is now valuing businesses on EBIT multiples & PEs again. Add to this the fact that costs are now rising across the board makes it even more important to be generating profits. Our Investment Process that only allows the purchase of companies that generate positive cash flow has positioned the portfolio well to navigate the current environment.

But determining a company’s actual baseline profit (and therefore the business value) with all of the government stimulus, commodity shortages, supply chain disruption and changes in consumer spending patterns over the past two years is tricky, let alone determining the right PE multiple to use. To do this, our team looks through the noise and determines where earnings are likely to be through FY23 and FY24 then applies a conservative PE or EBIT multiple (based on the quality of the business and its growth prospects) and right now we can see some significant opportunities emerging across the Australian market.

The health of the consumer and valuations of retailers are a real focus at the moment. In our report attached we discuss the Consumer Discretionary sector here as one area of the market we think is presenting the most opportunities, despite the recessionary fears and multiple profit warnings in the sector that are occurring in the USA.


This month, Ethical Partners has been focused on deepening our analysis and our engagements regarding Just Transition, one of our key ESG focus areas this year. Our team was grateful to meet and talk with Dr Chris Briggs from the UTS Institute for Sustainable Futures for a very thought provoking session in which we gained a much richer knowledge base about the risks and opportunities in the energy transition and the key roles that must be played in ensuring it is equitable. We look forward to sharing more details on how this has informed our engagements in upcoming reports.

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