Investment Matters

Company Profit Reporting season continues

It was another big week of company financial results.  Six of the investments in your equity allocation released results.

Cardno

Cardno is on track.  The restructuring is complete, and the turnaround is underway.

Earnings before interest, tax, depreciation and amortisation (EBITDA) (from continuing operations, Cardno sold a very good but non-core software business during the year) for FY-17 was $44m.  Operating profit (from continuing operations) more than tripled vs FY-16 to $19.2m.  On a per share basis (because of the equity raising in Jun-16) the profit increase was 65%.

Asia / Pacific operations (mostly Australia) continue to deliver.  Revenue of $276m generated earnings (EBITDA) of $30.1m.  The Americas generated $6.6m of earnings from $411m of revenue (i.e. at a considerably lower margin than work in Australia achieves).  And International Development generated $6.0m of earnings from $330m of revenue.  This business is in the aid and development arena, and has an amount of 'pass-through' earnings (on low or no margin).  Therefore historically it has, and will continue to, generate lower margins.  Cardno also has a division which houses non-core operations it plans to sell.  This generated $6.6m of earnings from $165m of revenue.

The big opportunity lies in the North American operations - in respect to improving margins, but also to grow revenue.  It is anticipated that the growth will both be organic and via smaller 'bolt-on' acquisitions.  The latter will increase the company's scale in relation to geographical reach and/or expertise adjunct to that it has currently.

Restructuring efforts are now complete - including greatly reducing the layers of management and reporting, and pushing responsibility and accountability back to the operational level where it should be.  Many other measures such as business development and employee contract standardisation have also been enacted.  The balance sheet is now one of the strongest amongst its peers, with net debt at $15.3m and gearing a low 3%.

The company has provided guidance for FY-18 of EBITDA between $55m and $60m.  This guidance shows the operational and earnings momentum that has been building in FY-17 is expected to continue into FY-18.

BHP

BHP's full year results were considered solid, and they were generally in line with expectations.

It should be noted that a recovery in the prices of the commodities BHP produces were embedded in the expectations.  FY-17 profit increased over 4.5 times, as compared to FY-16.  Although cutting production costs was an element of this, commodity prices were the key driver.  The profit increase flowed through to the dividend, which increased 169% in AUD terms.

As a result of the simplification of BHP's operational activities (including the spin-off of South32), BHP's operations now focus on iron ore (44% of group earnings), petroleum (20%), coal (19%) and copper (17%).

Cash generation was strong.  Net debt decreased from US$26.1billion at 30-Jun-16 to US$16.3billion at 30-Jun-17 and is on track to further reduce in FY-18.   The company announced it would exit (likely via a sale) its poor investment in US onshore energy (shale), which is expected to free up additional cash in FY-18.

Additionally, the company is committing to a capital end exploration limit of US$8billion p.a. for the coming 3 years.  For FY-18, the estimate is for a spend of US$6.8billion, with over half of that on maintenance, improvement and latent capacity (aimed at maintaining existing production levels or moderately increasing them). This is an increase on the US$5.2billion spent in FY-16 though.  Furthermore, the much discussed Jansen potash project in Canada will only proceed if strict capital allocation frameworks tests are passed (with investors cautious because of poor capital allocation in the past, for example, the Petrohawk acquisition).

Overall, it was a solid result from BHP, which saw a significant benefit from increased commodity prices.

CML Group

CML's result was the highlight of the week - and perhaps of this reporting season.

Invoices funded topped the $1 billion mark - showing considerable growth compared to FY-16 ($406m).  [CML provides factoring services, which is essentially providing funding on accounts receivable (invoices) so that businesses can realise their cash earlier].

The margin on the purchased invoices was 2.6% - lower than it has been historically because of the integration of a lower margin business acquired in H2 FY-16.  The margin trend into H2 FY-17 was positive (H1 2.4% / H2 2.8%), and the opportunity to move this back towards historical levels (~3.0%) is a real opportunity for further growth in earnings.

Speaking of growth - net profit in FY-17 increased to $2.5m, from $1.0m in FY-16 (excluding discontinued operations which made a loss in FY-16), on revenue which grew 48% to $40m in FY-17.  The fully franked dividend increased 25%.

The FY-18 outlook is for continued strong growth, supported by further growth in invoice funding, margin expansion and lower finance costs (as CML looks to refinance its current funding arrangements to lower cost bank funding).

HT&E

HT&E's result for H1 FY-17 (FY = CY) was mixed.  HT&E has two main divisions - Adshel (outdoor advertising), and Radio (metropolitan radio stations).  Performance of the former was really good and exceeded expectations.  The latter was disappointingly the opposite.

Please note that the revenue growth in the table below reflects an accounting change associated with Adshel becoming wholly owned.  On a proforma basis, group revenue increased 2% half-on-half.

Adshel grew revenue and earnings by 14% and 23% respectively, with buoyant demand in the outdoor advertising sector and the digitisation program delivering above market growth. 

The radio division (ARN or the Australian Radio Network) had a revenue decline of 6%.  HT&E noted that is was a weak radio market in relation to advertising spend.  ARN stations are holding up in relation to ratings, but the company is undertaking measures to improve advertising sales (such as new management and sales director).  Costs were essentially flat half-on-half (in dollar terms), and thus earnings declined 17%.

HT&E also owns a small outdoor advertising business in Hong Kong, which is under pressure in relation to trading conditions and therefore its earnings.  A strategic review has been announced, and it would not be surprising if this business was sold.

The company articulated the investments it is making in the digital space, including the e-sports initiative (click here), that will support growth in HT&E's radio and outdoor offering.

Looking to the future, this result has affirmed our positive outlook in relation to the outdoor business (noting that growth may not be linear and short term issues can arise such as digital panel roll out permits).  In relation to the radio business, we look to the company leveraging its rating position to stabilise advertising revenue (and thus earnings) from this division.

South32

South32's result showed leverage to commodity prices, as per BHP.  Revenue increased 19.6%, and profit increased from US$138m, to be in excess of US$1billion.

The company generated significant cash flow.  Part of this will be used to pay a material increase in the dividend to US10 cents.  The H2 dividend will be fully franked.  The company is also going to increase its on-market share buyback program.  South32 sees cash flow as vitally important for shareholders, and it intends to keep growing it.

South32 provided good data for the production outlook of its various operations.  Cannington (silver/lead/zinc) didn't meet production expectations over the last year, along with Illawarra metallurgical coal.  In relation to the latter, extensive reviews have been undertaken following the Appin shutdown, and remedial actions are underway with the plan to commence operations at Appin in early September.  A reserves update has been released for Cannington, which did increase reserves - but within a longer term decline trend.  Other operations are performing generally well, with production targets for FY-18 mostly in line with FY-17.

Southern Cross Media

Southern Cross Media delivered a good FY-17 result, which was positively received by the market.

All key financial measures saw growth, including revenue up 7.5% to $687.2m, net profit up 21.5% to $93.8m, and dividends up 14.8%.

On a divisional basis, Metro radio grew revenue 2.0%, and earnings 17.4%.  Earnings were supported by the licence fee relief provided by the federal government.  The advertising market was flat through the year, with H2 difficult because of cycling the FY-16 election related advertising spend.

Revenue generated by the Regional radio and television division increased 10.3%, and earnings fell 4%.  The is the first period where the relatively new Nine affiliate agreement washes through, with a higher revenue base but on a lower margin than the old Ten agreement.

The result was further supported at group level with lower financing costs (less debt), and a lower tax rate.

Operationally, the company is being proactive in generating new opportunities for growth - focusing on leveraging the digital content and audio capabilities, along with the local content it generates.  This includes, for instance, an agreement to put audio visual content via large digital screens into regional shopping centres, and a more strategic approach for advertising sales on a national and local basis.

In relation to the outlook, the company noted that Jul and Aug-17 were soft in relation to advertising demand.  Local (regional) advertising spend was acting to insulate weaker national / city advertising spend.   Revenue growth is expected for FY-18.