Investment Matters

What matters this week

It is starting to feel a bit soggy out there - in relation to the earnings being generated by Australia's corporates.

Pressure on AMP's share price continued this week (down another 3%, after last Friday's 9% fall), following a downgrade driven by issues in the wealth protection (insurance) division.  Another finance company in the news this week was ANZ.  It is selling Asian retail and wealth operations (retaining focus on institutional), and is planning to sell off its Australian product manufacturing business, to focus on banking and distribution.  ANZ is joining the ranks of many banks overseas - shrinking itself in response to the post-GFC and higher regulation world.

ANZ also released its FY-16 results.  It was technically in line with the low expectations - with cash profit down 18%.  But it was poor quality, with lower tax assisting the result.  As per NAB last week, ANZ's dividend payout is getting (in our opinion) quite unsustainable - increasing from 70% to 79% of cash earnings from FY-15 to FY-16.  And this is after the dividend was slashed 12% vs FY-15.  The company's CET1 (Common Equity Tier 1) capital was flat year-on-year, and although bad debt provisions did increase marginally, it is a very low percentage (too low?) of the overall loan book.

It was another week of retailers in the financial headlines.  After market Wednesday Adairs' - designer and retailer of linen, homewares and the like - released of a substantial downgrade (15% earnings fall for FY-17e, vs FY-16).  The market punished the company - with a 42% share price fall on Thursday.  Harvey Norman released its sales figures for the quarter ending 30-Sep-16.  The strong growth in Australian store sales, +5.4% vs pcp, was actually a moderation (the average growth vs pcp for the preceding four quarters was 8.4%) - and with concern about this continuing, the share price moderated too.

Elsewhere, Fairfax (publisher of the Melbourne Age and Sydney Morning Herald, amongst others) is struggling somewhat, with overall revenue down FY-17 year-to-date (vs pcp), including a decline in the number of its Domain magazine property listings in Sydney and Melbourne.  Its share price is down 7% this week and down by almost 20% this FYTD.

But it is not all doom and gloom out there.  The significant decline in Australia's September trade deficit to $1.3b (vs $1.7b expectation, and the revised $1.9b figure for August) should be greeted with joy by miners.  And Australia's government.  Higher commodity prices - coal of particular note - were the driver, and this will correspond to increased revenue, and earnings.  Along with a much needed higher tax take for the government.

Warrnambool Cheese and Butter (WCB) was a little ray of sunshine in the tumultuous dairy sector.  Its first half results (ending 30-Sep-16) saw a return to profit.  The company did note, however, a cautious outlook.  And finally, CSR's share price was up 9% on Wednesday.  The company's building products division was the driver of the 12% increase in earnings for the half year ending 30-Sep-16.