SUL has been a strong contributor to returns in the Income Portfolio, having bought in May below $14, while we’ve also taken a nice dividend of ~$1.24 inclusive of franking, putting the position up nearly 40%. Straight after we bought SUL, we were down almost 10%, prompting us to ask at the time (here), have we made a mistake? Our thesis has ultimately played out, and the position has done well. However, we now ponder the next catalyst for the share price.
- At the time of purchase, we believed SUL was trading on the cheaper side, given several internal issues that had weighed on sentiment. However, that in itself is not a reason to buy —a catalyst is needed. The catalyst was low expectations ahead of an earnings report, creating a high probability of an earnings beat.
Consensus upgrades to earnings amplified by an expansion in the earnings multiple the market is prepared to pay will lead to a decent rally in the shares. In this case, consensus earnings per share (EPS) increased ~4%, which was amplified by the earnings multiple moving from 12x to 16x, i.e. relatively cheap to relatively expensive.
The obvious next catalyst is interest rate reductions, but the key word here is obvious; it’s widely expected that rates will be lower by this time next year. We are heading into Christmas trading, and that is generally a good time for retailers, with SUL seasonality supporting this (average gain in December for the last 20 years of 3.8%). This is another potential catalyst, but less meaningful than our original trigger.
- All this being said, we’ve turned more neutral than bullish on SUL above $18.
MM is now neutral on SUL ~$18
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