The most recent reporting season has indicated retail companies operating in the Australian small-cap sector are under pressure, a domestic fund manager has said.
Maple-Brown Abbott Australian Small Companies fund portfolio managers Phillip Hudak and Matt Griffin have put forward this conclusion despite strong retail sales being sustained.
“Margins are under pressure and while retail sales are holding up, retailers are discounting prices to attract consumers who are reluctant to spend as cost-of-living pressures mount, reducing their margins. We have seen this is the case for listed retailers such as Myer and Adairs in the February reporting season,” Hudak noted.
“We’ve also seen more small caps downgrade earnings and earnings per share forecasts than upgrades, so there is some pressure being felt across the share market more broadly.”
The manager recognised merger and acquisition activity is boosting small-cap entities and it expects this activity to increase during the remainder of 2025. This prediction has been prompted by the devaluation of the Australian dollar, which has resulted in local assets being cheaper for offshore buyers, and cash-heavy private equity groups.
“Private equity money is chasing undervalued stocks in the small-cap space and so we are seeing increasing merger and acquisition activity,” Hudak shared.
“In recent times, Insignia shares have rallied amid an intensifying bidding war between private equity firms CC Capital, Bain Capital and Brookfield and we have also seen a takeover bid for Domain, which was a top performer this reporting season, from US giant CoStar.
“Another example is private equity-backed US pharmaceutical giant Cosette making a takeover bid for Mayne Pharma Group, and we believe that we will see a greater level of corporate activity going forward in 2025.”
Further, he predicted certain sectors would benefit from the upcoming federal election.
“We expect cost-of-living measures and fiscal spending to continue, which should be supportive for the aged-care and childcare sectors,” he indicated.
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