As FY23 draws to a close, there’s margin compression just about everywhere and investors are searching for safe havens

Nick Sundich Nick Sundich, June 15, 2023

Margin compression is happening just about everywhere you look on the ASX. With inflation at 4-decade highs, companies are seeing profit margins plunge even when demand isn’t doing likewise.

 

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DGL and CSL pay the price

DGL Group (ASX:DGL) is one such company experiencing margin compression. Having previously given EBITDA guidance of NZ$71.5-73.5m, it is now expecting $64-66m. The company told shareholders it had met its revenue guidance, expecting over $450m, but saw cost increases erode margins.

Even market darling CSL (ASX:CSL) couldn’t escape this curse. Margins were suffering given foreign currency headwinds, higher costs it had to pay to collect plasma as well as increased competition in the iron deficiency market – which it entered after acquiring Vifor.

CSL shares are down 6% this week. Arguably the impact was magnified because it has a virtually spotless record – at least in the last decade. The fall begs the question: Is there anywhere to hide in this market?

 

CSL (ASX:CSL) share price chart, log scale (Source: TradingView)

 

Is there anywhere to hide from the margin compression curse?

There are, but few and far in number. And there’s no guarantee that such companies will be able to hold margins steady if inflation stays elevated.

Electrical infrastructure provider IPD Group (ASX:IPG) is one of them. Earlier this week it told shareholders it was expecting 38-41% EBIT growth in FY23.

Lynch Group (ASX:LGL) is another company to tell shareholders it could expect margins to go the other way. LGL previously guided to $36-$40m in FY23 EBITDA at a group level, but now expects $42-$43m. Lynch also told shareholders to expect a resumption of dividends at results time.

And finally, Pacific Smiles Group (ASX:PSQ) expects solid revenue and earnings growth in FY23 – albeit because it swung into a loss in FY22 due to one-off costs and is getting back into the black.

But if even market darlings like CSL are suffering compressed margins, you can tell the inflation problem is serious.

 

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