Investment Matters

What matters this week: a lot

A large number of the heavy hitters were out to play this week.  There were a few surprises, and some interesting tit bits.  Overall (with some exceptions), profit results were not too bad.  Notable names that released acceptable results included Ansell, Amcor, Aurizon, Orara, Newcrest, Sydney Airports, GPT, Computershare, Goodman Group and CSL.

CBA released its half year results.  It wasn't too bad at headline, but how it got there raises some flags for the future - margin (NIM or net interest margin) was down, impacted by funding pressures.  Additionally, cost control, low bad debts and some hard-to-repeat product fee and income hikes supported the result.  And credit growth is benign.

ANZ's trading update, released today, looked quite good.  But it similarly has unsustainable bad debt provisioning. 

Wesfarmers' result was quite okay - with Kmart and Bunnings continuing to perform well.  Coles' numbers showed the business is starting to come under real pressure.   No-one really talks too much about the troubled Target anymore, and Officeworks continues to be the consistent stalwart.  The result was interesting in two respects: Wesfarmers flagged the potential sale or IPO of Officeworks (along with the Resources division which was previously flagged).  This was a little surprising, and may speak to future capital requirements of the group being higher than certainly we anticipated.  Secondly, Coles flagged going to war with Woolworths (my words, not theirs).  They essentially admitted they are prepared to sacrifice profit for market share.   Great for consumers.  Not so good for shareholders, especially in the short to medium term.  If anyone followed the battles in the UK supermarket space in recent years, one wonders if it could get as messy here.  Woolworths releases its result next week.

And moving to the disappointments...  Telstra.  It looked okay.  But scratch the surface, particularly the statutory numbers, and the systemic challenges faced by the company (e.g. aging copper lines facing redundancy, NBN changing the competitive dynamic of the market) are becoming very apparent.  And retail shareholders may be disappointed into the future, when (we assess) the dividend will be under pressure.

Medibank grew its revenue, but it took a bit hit to profit, as overdue investment in systems and customer service was enacted.  It released its result today, and the initial market reaction was somewhat negative.

Seven West Media's result was overshadowed by the activities of its CEO.  Management distraction is one issue - but bigger picture (and in reference to not just the activities, but how they have been handled by management and the Board), it speaks to the company's corporate culture, and not in a positive way.  The company's result showed an earnings decline (-31.8% underlying), and it wasn't that well received by the market - down almost 6% on the day of release. 

Domino's increased its profit 31% on the pcp (prior corresponding period).  The market was clearly disappointed - it's share price went down 14% on the day it released its results (with a partial recovery the next day).   It is actually a clear illustration that it does not matter what the profit number you print is.  Instead, it is what the numbers are as compared to expectations.   And it clearly didn't meet expectations, including a smaller-than-usual upgrade to its full year profit guidance and poor cash conversion.  Bottom line on this one is that it is ridiculously expensive, and there are a few operational issues starting to arise.  Caution required.

And finally, a truly ugly market update - Slater & Gordon.  The pain continues with a recovery in UK operations being slower than expected, and sentiment around the business staring to impact on the company's Australian operations (profit for H1FY-17 will lower than pcp).  Furthermore, net debt was $682m, at 30-Jun-16.    And the company's market cap is around $62m (with the share price at 17.5cents).  This clearly doesn't add up.  Unsurprisingly, it is in discussions with its lenders.