Special dividends aren’t something you hear much about these days, but there’s a chance Rio Tinto Limited (ASX: RIO) could pay one tomorrow.

Our largest iron ore miner is scheduled to report its first half earnings after the market closes on Wednesday and expectations are high.

The Rio Tinto share price jumped 1.2% on Tuesday to $104.11 even as the S&P/ASX 200 Index (Index:^AXJO) slipped 0.4% into the red on profit taking.

High earnings expectations

Rio Tinto just about regained all of its losses from the COVID-19 market meltdown and investors will see tomorrow if the rebound is justified.

But it isn’t so much the profit numbers that will be dominating as the market got a good sense of what’s coming after the miner posted its second quarter production report two weeks ago.

However, the analysts at Macquarie Group Ltd (ASX: MQG) still believes Rio Tino can deliver a modest but pleasant earnings surprise.

Chance of a small earnings beat

“Our revenue, EBITDA and earnings forecasts are 1%, 3% and 4% higher than Vuma consensus, respectively,” said the broker.

“Divisionally, our EBITDA forecast is in line for iron ore while beats in Aluminium and at IOC is offset by lower forecasts for Copper and Other.”

Dividends to steal the limelight

Having said that, it’s the interim dividend that will steal the show. Consensus expectations on this front is very wide as it ranges from US$0.94 to US$2.21 a share.

Analysts are clearly dividend on the dividend with Macquarie tipping a regular US$1.70 ($2.38) a share first half dividend. If the broker is right, it will reflect a 60% payout ratio.

“However, given strong iron ore driven cash flows and low levels of gearing of ~3%, we believe there is scope for a special dividend surprise of up to US$1.00,” added Macquarie.

High yield income stock

This will put Rio Tinto’s 2020 yield at 5.5%, or 8% if franking is included. That’s a pretty generous payment given that dividend superstar Commonwealth Bank of Australia (ASX: CBA) may not pay a final dividend this year.

Paying a special dividend provides a benefit beyond its monetary value. If management provides this one-off reward, it will also signal a bullish outlook.

High quality ASX stocks that are concerned about future earnings may still pay its regular dividend, but it certainly won’t cough up a special dividend.

Foolish takeaway

The broker reiterated its “outperform” (or “buy”) recommendation on Rio Tinto ahead of its results and its 12-month price target is $111 a share.

Other major iron ore producers are also well placed to undertake a capital return of sorts. But if I had to guess which, I would pick the Fortescue Metals Group Limited (ASX: FMG) share price over the BHP Group Ltd (ASX: BHP) share price.

More reading

• ASX 200 down 0.4%, Credit Corp and Temple & Webster impress
• Top broker warns earnings expectations for the ASX reporting season are too high
• a2 Milk and 1 other quality ASX 200 share to buy and hold beyond 2026
• UBS picks the best ASX gold miners to buy today
• ASX 200 jumps 0.75%: Westpac tumbles on AUSTRAC update, Credit Corp surges

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Commonwealth Bank of Australia, Macquarie Group Limited, and Rio Tinto Ltd. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Virgin Money UK PLC (ASX: VUK) share price will be one to watch on Wednesday following the after-market release of its third quarter update.

How did Virgin Money perform in the third quarter?

For the three months ended June 30, the UK-based bank reported a 4.8% increase in customer deposits to £67.7 billion. This was driven primarily by lower Personal customer spending during lockdown and Business customers maintaining higher levels of liquidity.

Virgin Money reported a 1% reduction in its Mortgage portfolio to £58.9 billion. This reflects the effective closure of the new purchase market under lockdown, partially offset by improved retention rates.

Pleasingly, the bank experienced a 5.7% increase in Business lending growth to £8.8 billion during the quarter. Management advised that this was driven by significant demand for the Government backed lending schemes. A total of £619 million of BBLS and £248 million of CBILS lending were provided at end of June.

Unsurprisingly, Personal lending reduced 2.7% during the quarter to £5.2 billion. This was due to lower credit card balances.

Net interest margin in line with expectations.

During the third quarter the bank’s Net Interest Margin (NIM) declined in line with expectations to 147 basis points. This means Virgin Money’s NIM now stands at 157 basis points for the 9 months.

Management revealed that this reduction was due to the immediate asset repricing following the base rate reduction and cost of holding excess customer deposits.

The good news is that liability repricing actions will drive an improvement in its NIM in the fourth quarter. As a result, management continues to expect a FY 2020 NIM of 155 basis points to 160 basis points.

Asset quality.

Virgin Money advised that it hasn’t seen any significant specific provisions or credit losses in relation to the pandemic given a backdrop of Government support and forbearance measures.

Nevertheless, it has updated its impairment models incorporating more cautious economic scenarios and refined its overlays to reflect payment holiday assumptions. This has resulted in a prudent net increase in its provisions of £42 million, primarily in Mortgages and Personal.

“A severely disrupted environment.”

Virgin Money’s Chief Executive Officer, David Duffy, was pleased with the company’s performance during the pandemic.

He commented: “I am pleased with the way the Group has performed during the pandemic. In a severely disrupted environment we are delivering on what we set out in May; to safeguard the health and wellbeing of our colleagues, customers and communities while protecting the bank.”

“Our Q3 financial results reflect lower demand from consumers due to the pandemic, but strong demand from businesses for Government supported schemes, with the Group further increasing its provisions to reflect the uncertain economic outlook while maintaining a focus on margin, cost and capital management,” he added.

The chief executive also advised that the bank has been supporting its customers during these difficult times.

He explained: “We have now granted c.67k mortgage and c.53k personal payment holidays, and we’ve supported c.25k business customers with lending arrangements. We know that things may yet get more difficult for many of our customers, but we are determined to continue to support their needs where we can and to fulfil our role in the economic recovery.”

Despite the pandemic, the company remains focused on the future and disrupting the status quo.

Mr Duffy concluded: “We have now recommenced our transformation and rebrand activity, taking what we have learned through the pandemic to deliver on our mission to disrupt the status quo as a full-service digital bank.”

More reading

• These ASX 200 shares were the worst performers of FY20
• ASX 200 drops 1.5% on elevated COVID-19 fears

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Deflation can strike fear into the hearts of ASX share investors. 

Deflation can eat away at profits and drive real returns lower. However, there are certain industries that may do better than others in a deflationary setting.

According to an article in the Australian Financial Review (AFR), now could be the time to start looking at those options.

The impact of deflation across industries

Westpac Banking Corp (ASX: WBC) is forecasting a record-breaking 2.4% decline in the June quarter CPI to be released today.

Deflation may set off warning bells for many investors. Given benchmark interest rates are affected by inflation figures, deflation could lower rates and impact returns on many loans, leases and other contracts.

However, the nuts and bolts of legal documents may save the day.

For starters, many landlords and other businesses have reference rates that include a floor at 0%. That means real estate groups like Mirvac Group (ASX: MGR) may weather any deflationary storm.

But it’s not just landlords and real estate moguls that may be protected. Industries that receive strong support through government contracts might also benefit.

One such industry involves toll roads, meaning ASX shares like Transurban Group (ASX: TCL) may do better than expected.

Long-term government contracts often have scheduled payment escalations, and that means current deflation will make those relative payment increases even more valuable.

How can I take advantage of deflation with ASX shares?

In theory, deflation should lower the price of general goods in the economy, which means earnings for consumer discretionary shares like Coles Group Ltd (ASX: COL) could take a hit.

Part of the reason for the forecast deflation is due to a short drop in fuel prices, and this could help industries that benefit from lower fuel costs. Normally that would be the travel sector, but thanks to coronavirus that’s no longer the case.

I would look at companies in the manufacturing sector that benefit from cheaper energy. A big-name manufacturer like Brambles Limited (ASX: BXB) could be in the buy zone.

I also think the healthcare sector could benefit due to its non-discretionary earnings.

Healthcare prices aren’t really correlated to the general price of goods and services. Therefore, an ASX healthcare provider like Ramsay Health Care Limited (ASX: RHC) could be worth a look to protect your portfolio against deflation.

Foolish takeaway

Investing in ASX shares to fight inflation can be good for diversification and overall return.

However, you may also open yourself up to other potential issues like currency or company risk.

More reading

• Top broker warns earnings expectations for the ASX reporting season are too high
• Why PolyNovo and these ASX healthcare shares could be long term market beaters
• Leading brokers name 3 ASX shares to sell today
• ASX 200 jumps 0.75%: Westpac tumbles on AUSTRAC update, Credit Corp surges
• Can the Marley Spoon share price climb even higher?

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Transurban Group. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Musgrave Minerals Ltd (ASX: MGV) share price has surged more than 20% in today’s trading before ending the session 6.5% up. The increase in the Musgrave Minerals share price came after the company reported ‘bonanza-grade’ drilling results.

Bonanza drilling results

Earlier today, Musgrave Minerals reported promising drilling results from its Starlight gold discovery at the Break of Day corridor. The company’s drilling report included results from 5 reverse circulation (RC) drill holes and 5 diamond drill holes. Results from the report were highlighted by bonanza-grade results of up to 3 metres at 884.7 g/t gold from 5 metres.

Musgrave also provided additional results from the 5 RC holes which included; 22 metres at 5.8 g/t from 15 metres (including 3 metres at 26.2 g/t from 31 metres); 5 metres at 14.3 g/t from 90 metres, and 6 metres at 5.3 g/t from 232 metres. Highlights from the diamond drill holes included; 16 metres at 13.7 g/t from 18 metres (including 4 metres at 40.8 g/t from 18 metres, 9 metres at 6.1 g/t from 25 metres, and 0.5 metres at 25.4 g/t from 269.5 metres).

According to Musgrave’s management, the drilling results confirm the high-grade nature of the Starlight and White Light discoveries. The company noted that further drilling is underway to extend the Starlight mineralisation site, with aims to complete a JORC (Joint Ore Reserves Committee) resource update late in the third quarter of 2020.

How has the Musgrave Minerals share price performed?

Musgrave Minerals is a gold and metals explorer and has 100% ownership of its flagship Cue Gold Project located in Western Australia. Both the Starlight and White Light sites at the Break of Day gold corridor are located in the Cue project.

The company has an $18 million earn-in and exploration joint venture with Evolution Mining Ltd (ASX: EVN) over the Lake Austin portion of the Cue Project. In late April, Musgrave completed a $6 million capital raise to accelerate drilling at the Starlight gold discovery site and to test similar targets along the Cue Project. Including today’s price action, the Musgrave Minerals share price has surged 390% since late May. 

Foolish takeaway

The Musgrave Minerals share price soared more than 20% higher in early trade, hitting an intra-day high of 83 cents. At the close of trade, the company’s shares have dipped to around 73.5 cents and are trading 6.5% higher for the day.

More reading

• ASX 200 jumps 0.75%: Westpac tumbles on AUSTRAC update, Credit Corp surges
• 5 things to watch on the ASX 200 on Tuesday
• Why the gold price just stormed to a record high
• New tailwind pushes gold price closer to record highs
• How to take advantage of the surging gold price

Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Catapult Group International Ltd (ASX: CAT) share price was out of form on Tuesday and dropped notably lower.

The sports analytics and wearables company’s shares fell as much as 5.5% to $1.69 at the close.

Why did the Catapult share price drop lower?

Although Catapult released an update on its customer-led innovation, I suspect that something else could be weighing on investor sentiment today.

On the other side of the world in the United Kingdom, over 400 current and former professional soccer players are understood to have signed up to something called “Project Red Card.”

According to the Athletic, these players are raising questions regarding who owns and profits from the data generated when they play.

Project Red Card is looking to take legal action against betting, gaming, and data-processing companies for six years’ worth of lost earnings. The players believe their statistics are being used without their permission and without any sort of compensation.

Given how Catapult has a long history of providing broadcasters with in-game data, investors may be concerned that Project Red Card could have an impact on this revenue stream.

Though, it is worth noting that legally you can’t trademark or copyright a fact that is already in the public domain. So the aforementioned project, could quite easily fall flat on its face before it even gathers pace.

Nevertheless, it will be interesting to follow developments and see what impact this has on future sports data collection and usage.

Should you buy the dip?

Today’s decline means that Catapult’s shares are now down 23% from their 52-week high.

While this leaves them trading at a potentially attractive level for a long term investment, I would suggest investors wait for its full year results release and FY 2021 guidance before picking up shares.

More reading

• 3 exciting ASX growth shares to buy and hold
• The Catapult share price has surged 33% in 3 days
• Market close: ASX 200 falls 0.5%
• Why Catapult, Eclipx, FlexiGroup, & Whispir shares are charging higher
• Catapult share price on watch after FY20 Results Preview

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Catapult Group International Ltd. The Motley Fool Australia has recommended Catapult Group International Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Oh man.

I can’t remember the last time I was so unhappy about being right.

To be fair, I don’t do predictions, usually. Trying to guess the zigs and zags of the market is a game that belongs in Sideshow Alley, not the preserve of finance types.

Still, I was horrified — and said so — about the Federal Government’s policy to ‘help’ people by letting us raid up to $20,000 of our Super.

It was — and remains — a woefully conceived and implemented policy, which was always going to have the effect of costing people hundreds of thousands in retirement.

And yes, some of the people involved did need help (let’s put aside the thousands who took out their Super without meeting the eligibility criteria, and who could have to pay it back. Plus interest. Plus a fine).

No, that’s not even close to the worst of it.

People who needed a financial bridge to get through COVID-19 were encouraged by the government to dip into their retirement savings.

Meanwhile, billions and billions and billions of dollars were being thrown around like confetti.

Airlines? Here’s $700m.

JobKeeper? Have $130 billion. Or $60 billion… who can know?

I could go on. If you have a pulse, you get cash. Well, except for one specific case.

You’re an individual under financial stress? Can’t help you. Not enough money.

Sorry, you’ll have to go poor(er) in retirement, instead.

Which, if your ideology stretches to that point, is one thing.

But compared to the generational public debt being racked up for everything else?

Well, it’s hard to see how the response isn’t apples and oranges.

That much was able to be foreseen (except, it turns out, by the government).

What I didn’t foresee, at least to the extent that it happened, is the absolute disaster it’s turned into.

Apparently motorbike sales are through the roof. So, if you believe the news, are plastic surgery and tattoos.

Just the sort of thing Super is supposed to be there for, right?

Then, this morning, news from IndustrySuper, via Effie Zahos:

“According to @IndustrySuper 560k Aussies have wiped out their super funds. At least 460k of them are under the age of 35…”

Half a million people.

Now with no Super.

Bloody hell.

If you don’t think this is a massive issue, I’ll respectfully suggest you don’t understand it well enough.

I spend much of my professional life trying to tell people to make sure they don’t take risks that lead them back to Square One.

You’ll almost certainly never make it back again, given the biggest influence on your retirement nest egg is likely to be not returns, or even fees.

It’s ‘time’.

Because money you have at 35 has three decades to compound between then and retirement.

And if you can leave it longer (while you spend other money, including future contributions), that initial nest egg might actually compound into your 70s or 80s.

Imagine that. 5 decades of compounding.

Gone.

Because the government thought that you weren’t important enough to include in the cash splash, and that your 3, 4 or 5 decades of compounding at 6, 8 or 10% wasn’t worth the government borrowing a few more dollars at less than 1%..

It beggars belief.

Speaking of which, the gold price hit a record high in the US overnight.

Which is both a huge surprise and totally expected.

Huh?

Well, gold has traditionally — almost always — risen in times of uncertainty and fear. The reasons aren’t easy to explain — it tends to be a self-fulfilling prophecy more than anything.

I mean why gold, rather than anything else? 

Probably, despite all of the earnest rationale expressed by commentators, simply because it’s become an article of faith.

Once people believe that gold will go up in times of fear they buy… because gold goes up in times of fear. Which — and you’re probably ahead of me already — pushes the price up!

As I said, a self-fulfilling prophecy.

What’s strange, this time, is that while gold is hitting record highs, so is the US stock market. And while we’re not hitting the same highs, the ASX is up some 35% since the March lows.

Shares and gold are usually yin and yang — one falling while the other rises.

To have them both rise at the same time is very unusual. It seems investing — like much of public life — is polarised. One group of people believing that owning shares, pre-recovery, is getting ahead of the curve. Another group is pretty sure things are either going to get worse, or stay bad for a while, so they’re buying gold.

It’s possible they’re both right, but that’s a pretty small gap to put a battleship through.

Me?

Well, I’m a shares guy.

And shares have trounced gold over the long term, cyclical swings notwithstanding.

You’d be pretty gutsy to expect gold to win over the long term from here, too.

Indeed, while shares tend to set new highs and keep climbing (with plenty of down periods, too), selling gold at or near a peak tends to be a smart strategy, given that it’s much more cyclical than the stock market, writ large.

Or, put another way: do you really want to buy a cyclical commodity at the very time when it’s at a cyclical high?

I didn’t think so.

I have no idea what happens to shares or gold in the short to medium term. No-one else does either.

Over the long term, though, I’ll be incredibly surprised if gold wins.

As Warren Buffett wrote a couple of years ago:

“Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods. That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy 3 1⁄4 ounces of gold with your $114.75.

And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business.”

Yeah, I’m with Warren.

Which doesn’t mean things can’t be wonky for a while. As I said, I don’t have a short term prediction.

But as with most cyclical things, it’s better to buy at the bottom (even if people are freaking out) and sell at (or near) the top, even if that’s precisely when all of the news is positive.

Which leads me nicely to earnings season, which has just kicked off in earnest.

This is going to be one of the stranger ones for a while.

We all know things are going to be subdued. But, whereas many businesses are usually relatively predictable beasts, COVID has turned our expectations on their heads.

Earnings season is always better called ‘expectations season’, because share prices move not based on whether earnings were ‘good’ or ‘bad’, but whether those earnings were better or worse than the market expected.

(Which is why you can see profits fall 90% and a share price rise, or profits double and shares fall!)

But this year, the range of potential outcomes is just massive — even for the most usually-pedestrian businesses.

Expect lots of volatility over the next 5 weeks. Lots of it.

And, as ever, make sure you look through these current earnings. Share prices should reflect a company’s total earnings, from here to eternity — not just the impact of the last, or next, six months.

If the market over-reacts — in either direction — the savvy (read: capital-F Foolish) investor will be presented with an opportunity.

Make sure you’re emotionally and financially ready to pounce. 

We are.

Fool on!

More reading

• What would deflation mean for your ASX shares?
• Musgrave Minerals share price climbs 7% on ‘bonanza’ drill results
• Is this why the Catapult share price sank lower today?
• WAAAX shares see mixed recovery from COVID-19
• Tesserent share price jumps 12% on quarterly update

Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Early 2020 was all about ASX WAAAX shares. But since the onset of coronavirus, we haven’t heard as much from these former share market darlings. Afterpay Ltd (ASX: APT) seems to have eclipsed its fellow tech shares as its share price continues to hit new heights. The other WAAAX components, WiseTech Global Ltd (ASX: WTC), Altium Limited (ASX: ALU), Appen Ltd (ASX: APX), and Xero Limited (ASX: XRO), have had mixed performances. Although grouped together by the WAAAX acronym, these ASX tech companies have vastly different businesses. This means the COVID-19 pandemic is having different impacts on them. We take a look at the recent performance of the ASX WAAAX shares. 

WiseTech

The WiseTech share price is down 11.1% for the year and up 98.2% from its March low. WiseTech is a logistics software provider whose flagship platform, CargoOne, can be tailored for each customer’s supply chain. WiseTech’s platforms are used by customers to manage global customs requirements, compare freight rates, track transport, oversee warehousing, and book parcel shipping.  

WiseTech reaffirmed its FY20 earnings guidance for revenue of $420 -$450 million in April. The company said onboarding of new users has substantially offset expected disruptions from COVID-19. There has been no update on business operations since then, however founder Richard White sold 2,445,653 shares last month, netting some $46 million. 

Prior to the onset of coronavirus, WiseTech had been on an acquisition spree, snapping up some 15 companies in FY19. Earlier this month, WiseTech announced that it had renegotiated earnout arrangements for some acquisitions, removing $33.3 million of future contingent cash liabilities. Instead, $10.4 million in equity was issued, a cash payment of $1.7 million was made and $18.2 million of potential future equity earnouts remain. 

Afterpay 

The Afterpay share price is up 135% over the year and 673% since its March low. Afterpay is a well known buy now, pay later (BNPL) provider which boasts nearly 10 million customers across Australia and New Zealand, the United States, and the United Kingdom. Afterpay’s business has been accelerated by the shift to eCommerce resulting from the pandemic with underlying sales increasing 112% in FY20 to $11.1 billion. 

Afterpay took advantage of the rise in its share price to undertake a capital raising earlier this month. The BNPL provider raised $800 million via a placement and share purchase plan, with funds earmarked for investment in growing sales and global expansion. Afterpay says the pandemic has caused a shift towards online spending and focus on budgeting, as well as a greater aversion to traditional credit products. The company believes it is well placed to exceed its underlying sales target of $20 billion by the end of FY22. 

Altium

The Altium share price is down 4.6% since the start of the year and up 34.3% from its March low. Altium provides electronics design software for engineers who create printed circuit boards. Printed circuit boards are used in just about every electronic appliance – from cell phones and televisions to microwaves and digital clocks. Altium reported strong revenue growth of 10% in FY20 despite the challenging COVID-19 environment. 

Revenue grew to US$189 million thanks to a solid performance by core business units and key regions. The subscription base grew 17% to well over the company’s 50,000 subscribers target. Altium’s strategy of providing attractive pricing and extended payment terms to support customers during COVID-19 has been rewarded. This has driven volume and supports Altium’s pursuit of market dominance. 

Appen

The Appen share price is up 60% from the start of the year and 110% since its March low. Appen provides data used to build and improve artificial intelligence systems. The company collects and labels images, text, speech, audio, video, and other data which is used to train artificial intelligence products. Spending on artificial intelligence is growing at a compound annual growth rate of 36% according to Markets and Markets, which has resulted in a track record of high revenue and earnings growth for Appen. 

In 2019, Appen’s revenue grew 47% to $536 million, underpinned by demand from existing customers for existing and new projects. A substantial investment in sales and marketing was made in FY20 to lay the foundation for future growth. Appen is investing in sales teams to win new customers and diversify revenue, with a focus on the government and China markets. At the end of May, Appen advised that it expected the pandemic to have a negligible impact on business and reaffirmed its FY20 guidance of EBITDA in the range of $125 million to $130 million. 

Xero

The Xero share price is up 15.8% from the start of the year and 58% since its March low. Xero provides cloud accounting software to small and medium businesses. Xero’s financial year ends on 31 March, so its FY20 financial results did not see the impacts of COVID-19. Many of Xero’s small business customers are concerned about the impacts of the pandemic, particularly those in the tourism and hospitality sectors. Nonetheless, Xero added 467,000 subscribers in FY20, bringing total subscriber numbers to 2.285 million. Annual monthly recurring revenue grew 29% to $820.6 million leading to Xero’s first full year profit of $3.3 million after tax. 

Xero has a global footprint with significant numbers of users in Australia, New Zealand, the UK, and North America. Free cash flow increased to $27.1 million in FY20, equivalent to 3.8% of operating revenues. Xero had a net cash position of $111.5 million at 31 March 2020, up from $100.6 million at 31 March 2019. Xero’s strategic priorities are to drive the adoption of digital accounting and build for global scale and innovation. Trading in the first part of FY21 has been impacted by the COVID-19 environment and continued uncertainty means Xero has yet to provide guidance on FY21 outcomes. 

Foolish takeaway

Some WAAAX shares are adapting to COVID-19 trading conditions better than others. While Afterpay is benefiting from the shift to digital, Appen appears unaffected, and Xero’s small business customers are suffering due to lockdowns.

More reading

• Afterpay and Immuron were among the most traded shares on the ASX last week
• Latest ASX entrant mixes BNPL with eCommerce
• Is CommBank the BNPL killer?
• 5 things to watch on the ASX 200 on Tuesday
• Why I would buy and hold NEXTDC and these quality ASX growth shares

Kate O’Brien owns shares of Altium and Appen Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of AFTERPAY T FPO, Appen Ltd, and WiseTech Global. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Tesserent Ltd (ASX: TNT) share price is currently trading 12.82% higher following the release of a strong quarterly report for the period ending June 2020. The company is Australia’s largest ASX-listed cybersecurity provider. 

The report follows the strategic acquisition of Melbourne and Canberra-based cybersecurity consultancy Seer Security, which sent the Tesserent share price flying last week. 

Quarterly report

According to the report, Tesserent’s revenue in Q4 2020 of $10.96 million was 32% higher than Q3.  Additionally, the per annum revenue run rate as at 30 June 2020 was $43.8 million.

Pleasingly, Tesserent achieved positive earnings before interest, tax, depreciation and amortisation in Q4 and positive cash flow from operations in June. The company reported that cash receipts of $12.3 million in Q4 were up 73% compared to Q3, and it had $4.34 million in available cash at the end of Q4.

The company has signed an agreement with Pure Asset Management for a new debt facility of $15 million. This replaces the existing $5 million dollar facility on an improved interest rate of 8.9% per annum, compared to the prior rate of 11.5%. The funds will be used to support further acquisitions. 

Tesserent has indicated that strategic acquisitions are a cornerstone of its growth strategy to drive earnings.  

Seer acquisition

The Seer Security acquisition strengthens the relationship between Tesserent and the federal government, given Seer’s many long-term contracts with a number of government departments and agencies.

In FY20, Seer reported revenue in excess of $7.6 million and $2.2 million in sustainable earnings. The forecast for earnings in FY21 is expected to be strong.

The Seer acquisition is fully funded through Tesserent’s debt funding facility with Pure Asset Management. The consideration will be $5 million in cash and shares in Tesserent.

In the acquisition announcement, Tesserent’s co-chief executive officer Julian Challingsworth commented, “current market conditions continue to present tremendous consolidation opportunities in the short to medium term, and we fully expect to take advantage of this with additional acquisitions currently under consideration”

About the Tesserent share price

The most recent Seer acquisition follows other acquisitions in 2019. Last year, Tesserent also acquired Rivium, Pure Security and Canberra-based North. As a result, the bolt-on acquisitions deliver a wide range of cybersecurity services to help drive Tesserent’s earnings higher.

At time of writing, Tesserent shares are trading at 22 cents which represents a gain of 12.82% in today’s trade. Additionally, over the past year the Tesserent share price has increased 315.09%.

More reading

• Tesserent share price surges 42% following new acquisition
• Tesserent share price leaps 28% following trading update

Motley Fool contributor Matthew Donald has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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