Health Of The Market July Update

Rising Insolvency Risks Put Focus Onto Balance Sheets

Corporate insolvencies have hit record levels on the back of deteriorating economic conditions, cost of living pressures and elevated debt costs. In fact, statistics from the Australian Securities & Investments Commission has pointed to a 40% rise in the number of corporate bankruptcies year-on-year. We expect this trend to continue as RBA Governor Michelle Bullock has signalled to that interest rates are unlikely to be cut until at least next year.

Australian insolvency statistics

Source: ASIC (12 August 2024)

Within the listed ASX space, we recorded five corporate failures in July. Among this group three prominent companies entered administration as rising interest rates, inflationary pressures, and weakened consumer spending created a challenging environment for small businesses with low customer retention. These companies have all been rated as unhealthy based on our Financial Health Model.

Booktopia Group (BKG), once celebrated as a high-growth online marketplace with significant potential for capital efficiency, struggled post-IPO. After going public in 2021, the company faced difficulties when markets collapsed in 2022. The management grappled with logistics and staff retention issues following an expensive warehouse expansion in Sydney. With slowing growth and high fixed costs, Booktopia was unable to reach the scale and volume required to achieve profitability.

Source: Stock Doctor

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Mighty Craft (MCL), a craft beverage accelerator with a diverse portfolio, provided capital to local brewers to fund production, distribution, and sales. However, the business model had never been profitable, and rising interest rates further restricted the company’s ability to support early-stage production and sales. Despite recent efforts to sell portions of their portfolio for cash, MCL’s private credit lenders were unwilling to provide additional support beyond existing loans. This has led to a lengthy process of restructuring as lenders seek to recover their capital.

Source: Stock Doctor

Take a Trial and Check MCL on Stock Doctor Now

Regional Express Holdings (REX), an airline with more than 20 years of service to Australia’s regional and major aviation routes, also folded. In 2002, two Singaporean business partners took over and merged Hazelton and Kendell regional airlines from the remnants of the Ansett Group. REX delivered $11.3 million in net profits in FY05, just two years after a successful turnaround. Former Chairman and Founder Lim Kim Hai, who was known for prioritizing reliability over growth, claimed a cancellation rate of just 0.1%. However, the company’s most recent half-year report ending December 2023 reflected a net loss of $3.2 million, despite growth in revenue and passenger numbers.

REX maintained its reputation for excellence and reliability, even winning Australia Aviation’s Airline of the Year award with a cancellation rate of just 1.7%. Nevertheless, Lim Kim Hai was removed from the Board in June after REX’s private equity shareholders, PAG Group, pushed for his replacement. REX’s financial troubles were significant, with long-term debt escalating from $4 million pre-COVID to $368 million in its latest report. This debt was largely incurred to finance the expansion of new flight routes and the acquisition of new aircraft to replace its aging fleet. Despite its efforts, REX was unable to compete with larger airlines like Qantas and Virgin, operating at much lower load capacities, which further eroded its margins. Ultimately, the company’s ambitious growth plans and mounting debt led to its downfall, mirroring the fate of its peer, Bonza.

Source: Stock Doctor

Take a Trial and Check REX on Stock Doctor Now

Prepare your portfolio for the reporting season

Large cap stocks are not immune to changes in financial health and over the last few months numerous large unhealthy businesses have released disappointing updates including Star Entertainment Group (SGR), women’s retailer City Chic (CCX), chemicals producer Nufarm (NUF), global packaging firm Orora (ORA), building materials business Fletcher Building (FBU) and property developer Lendlease (LLC).

To prevent large drawdowns, investors should stay away from financially weak stocks, instead replacing them with high-quality businesses.

The Portfolio Manager and Optimiser makes this task easy by allowing you to sell and rebalance your stock holdings. In addition, you can build a list of potential opportunities that you can pick up over the reporting season by creating a Watchlist of stocks.

Source: Stock Doctor

Alerts are a great way to ensure you are informed when there is a change to the financial health rating, star stock change or if the share price triggers an exit on the SD30TSR.

Our client services representative, Victor, is available for further enquiries into our array of investing tools.