Investment Matters

Company profit reporting season kicks off well

Company profit reporting season...

...has commenced.  This is for the six months ending 31-Dec-16 for companies with a 30-Jun financial year-end (most companies), and for the 12 months ending 31-Dec-16, for companies with a 31-Dec financial year-end.

As always, reporting season has had a slow start, with most companies reporting in the last 2 weeks of February.

However, companies that our clients own kicked off reporting season with more activity than usual - Suncorp, Paragon Care, the Centuria Metropolitan REIT (formally the 360 Capital Industrial Fund), and the Centuria Urban REIT (formally the 360 Capital Office Fund) released their results.

Suncorp

Overall, Suncorp reported a good result, with cash earnings increasing 5.0%, cash earnings per share increasing 4.8%, and dividends increasing 10% to 33 cps (as compared to the half ending 31-Dec-15).

Suncorp's main division - General Insurance - performed well.  Operating earnings increased 55.4%.  Insurance margin increased 10.1% from one year earlier, but was flat versus six months ago, at 11.0%.  In coming periods, we expect to see this increase above the company's target of 12%.

Life Insurance remains troubled, with underlying profit declining 3.8%.  And also being the smallest contributor to company earnings, we would not be surprised to see Suncorp sell or reduce exposure to life insurance related lines.

The Banking division continued its solid contribution to earnings, with earnings up 0.5%. Wealth moderated earnings from the traditional banking operations.  Lending growth was moderate (a good thing, given it is mostly residential) at 2.5%.  However, impairment losses were only $1m - which we consider highly unsustainable.

Suncorp remains well capitalized, with excess tier 1 (CET1) capital of $448m at 31-Dec-16 (increased from $346m at 30-Jun-16).

Suncorp

Paragon Care

Paragon released a strong result, with both organic growth and past acquisitions contributing to the 43% increase in revenue, and 42% increase in profit.

The company's balance sheet is strong, with gearing at 19.2%.  This provides the capacity to make additional small acquisitions, continuing the company's strategy to consolidate the fragmented medical supplies sector.  Cash flow was weaker than expected, due to a variety of factors including tax payment timing and an increase in inventory being held to cater for future demand.   We expect to see cash flow strengthen in H2.

Returns are expected to be weighted to the second half year, with the company providing a FY-17 forecast for revenue of $115m to $120m, and earnings before interest, tax, depreciation and amortization to be $15.7m to $16.7m (as compared to $6.7m in H1 and $12.1m for FY-16).

Paragon

Centuria Industrtial REIT

Centuria Industrial REIT's results were in line with expectations.

Operating earnings were slightly up (+1.7%) half on half, and were similarly up on a per security basis.

Gearing remains comfortable at 31.9%, and net tangible assets per security increased 6.4% to $2.32 - reflecting strong property revaluations.  Portfolio metrics remain sound with 98.9% occupancy, and an average lease term of 4.2 years.

Centuria retained the FY-17 earnings guidance of 18.7 - 19.0cps.

Centuria Industrial

Centuria Urban REIT

Centuria Urban REIT's results were also in line with expectations.

Operating earnings were down because of the sale of a property in Canberra in Nov-15 (i.e. it contributed to earnings in the prior corresponding period).

Gearing remains conservative at 19.7%, and net tangible assets per security were steady at $2.27.  Portfolio metrics also remain sound with 99.2% occupancy, and an average lease term of 4.6 years.

Centuria retained the FY-17 earnings guidance of 16.0cps.

Centuria Urban