Investment Matters

What matters this week: NAB - pink lipstick, but it still oinked

The market liked the pink lipstick:  NAB's financial result for the full year ending 30-Sep-16 kept the investors (especially the retail ones) happy.  The dividend was held constant at 99 cents per share for the half (198 cents per share for the year).  And cash earnings grew 4.2% to $6.5 billion.

But it still oinked. 

Let's consider the key drivers of, and risks related to, a bank's performance:

  1. Revenue - fell 1.7%
  2. Tax rate - windfall at 28.4%
  3. Bad and doubtful debts remained benign ($425m at Sep-16 vs $349m at Sep-15).  Is this very low level vs the total loan book really sustainable? (we assess no)
  4. Dividend payout ratio is now above 80% (80.7% of cash earnings for FY-16, vs 79.5% for FY-15).  65% to 70% is a more realistic long term number (in our opinion), especially noting point 5 below.
  5. Capital (CET1 [1]) fell from 10.2% at Sep-15 to 9.8% at Sep-16. The outlook for regulatory capital requirements is for higher CET1.  The payout ratio / global capital tightening / APRA dynamic will be most interesting going forward.
  6. Net interest margin (NIM) went from 1.88% at Sep-15, to 1.93% at Mar-16 but fell to 1.82% in Sep-16.  NIM is the essentially the difference between interest earned (e.g. from your home loan) and interest cost, and is thus a key measure of health and profitability of a bank.
  7. Cost base increased 2.2% year-on-year.

The bottom line is that earnings on a per share basis deteriorated (caused by additional shares on issue).  Specifically, cash earnings per share fell 1.6%.  This is the number that should matter to shareholders, not the 4.2% headline increase.  Pink lipstick can't hide this.

Wesfarmers was the other prominent name in the press this week.  It was down 6% on Wednesday and down 9% for the week following the release of the first quarter sales figures.

Coles (excluding convenience stores) increased sales by a less than expected 2.9%, and on a like-for-like basis (excluding new stores) the increase was 1.8%.  Target, convenience stores, and even Bunnings to an extent, also disappointed.  After many years of strong sales growth from Coles, it appears that increased competition from Woolworths, along with ALDI (including the SA and WA expansion), is catching up with the market darling.   Shoppers will be the beneficiaries should the competitive dynamics continue - shareholders not so much.

Sales by Woolworths' Australia Food division increased 1.7%, or 0.7% on a like-for-like basis in the first quarter.  Although these numbers are not as strong as Coles, it is about the trajectory.  In contrast to Coles, based on these figures there is increased confidence that Woolworths is successfully turning its food operations around.

In contrast to Wesfarmers and Woolworths, electronics retailer JB Hi-Fi's like-for-like sales increased 8.3% in the first quarter.  The company has benefited from the demise of Dick Smith, along with the iPhone7 launch.

And finally, to the tragic accident at Dreamworld on the Gold Coast.  Dreamworld is a major asset of the listed trust Ardent Leisure.  It's security price fell 28% from before the accident, to recover somewhat and finish the week down 16%.

Perhaps Ardent should take a leaf out of Johnson & Johnson's response to the Tylenol poisoning incident in 1982.  See Wry & Dry's article.  Shutting down and rebuilding / refurbishing would destroy profit in the short term.  But the long term reputation and legacy benefits may make it worthwhile.  Ardent initially planned to partially reopen Dreamworld today, and its PR subsequent to the accident has been disastrous.  So maybe management need to be taking some Tylenol.

[1] Common Equity Tier 1.  The widely used measure of capital adequacy of a bank.