Investment Matters

What matters this week: the US market continues its run

The US market has continued its remarkable run.  The Dow Jones (the large cap index) had its 10th successive positive trading day.   

The focus in Australia is all on company profit reporting season.  The week started with a bit of a wobble.  Brambles (blue Chep pallets) and WorleyParsons (engineering services) released disappointing results.  They traded down 9.9% and 12.8% respectively on Monday.  US operations of the former are coming under pressure, with lower growth, along with higher costs and increased competition.  Not having a contract with Amazon didn't help things.  Additionally, Brambles dumped its medium term growth target, implying that medium term growth is likely to come under pressure.  

In relation to WorleyParsons, its cash flow came under serious pressure - to the point that some in the market are speculating that if the outstanding bills from four unnamed state-owned enterprises are not paid soon, a capital raising is on the cards.   Excluding this, we assess the result as okay - certainly it appears that earnings have bottomed, with a brighter outlook (e.g. work on hand).

As usual, press headlines were designed to hype.   For instance, Tuesday's AFR: "Scentre Group reports 10.4pc rise in profit to $3b".  Technically correct.  But highly misleading.   Let us consider revenue first.  Property rental income down.  Property development income down.  Property management income down.  Equals revenue down 12.1%.  Now moving to profit.  Scentre (Westfield Australia essentially) indicated that it eked an underlying profit (also called FFO [1]) growth of 3.2%.  Notably, this was supported by a considerably lower interest expense.  Finally, the "$3b" profit included property revaluations of $1.49 billion.  Profit (FFO) was $1.24 billion.  Scentre is a well managed REIT.  But a headline of 10.4% profit growth does not in any way reflect the actual performance of Scentre, or the tough environment being experienced Scentre (and by retailers and their landlords more generally).

Following Santos' results release last Friday (turnaround continues), energy producers Oil Search (delivering, with upside), and Woodside (steady as she goes) released their result this week.

On Wednesday, the focus was on Woolworths.  What is clear is that it is going to be a long, hard road to turn Woolworths around - which really isn't reflected in the company's share price.  To its credit, they are not focused on the short term.  Instead it will do things like using the proceeds of the fuel business sale (assuming it gets regulatory approval) to step up store upgrades and refurbs, and also to get its debt down (noting the significant off-balance sheet liabilities the company has).  Putting BigW aside (as per Wesfarmers' Target, Woolworths has its own Achilles heal), revenue / sales increased.  However, earnings from the company's largest division, Food (Australian supermarkets) fell 13.9%, and NZ Food (Countdown supermarkets) fell 4.5%.  Endeavour Drinks (includes BWS and Dan Murphy's) did better with an increase in earnings of 3.1%.

Ardent Leisure had a bit of a shocker.  But it wasn't the Dreamworld incident that caused the fall - that had already been built in to expectations.  What hadn't been was the performance of their US entertainment centres, called Main Event.  Same store revenue fell 2.9% - which really undermines the growth expectations held for this business, as well the aggressive new store rollout schedule.

Qantas' result was in line with expectations.  But those were pretty benign expectations.  Being a quasi-energy company (not really, but fuel prices do have a significant impact on profitability), a lower realised fuel cost is a significant positive for earnings.  Combined with successful efficiency / cost reduction programs being enacted, it is a little surprising that profit fell by 25.1%.  What this does tell us is just how tough the competitive environment is at the moment.  One other point with Qantas - as we have seen more than ever this reporting season - "underlying" figures should not include costs that really are part of running a business, and not exceptional.  We might write some more about this some day.

This week was also notable in relation to a number of big name management changes, not just Ahmed Fahour (see W&D).  Chris Rex, CEO of Ramsay Health Care was perhaps the biggest shock.  He was part of the furniture (in a good way), being MD / CEO for 9 years, as well as Chief Operating Officer for 13 years prior.  The company has grown substantially and expanded overseas under his tenure.  Other departures included James Fazzino, 14 years with Incitec Pivot as CEO / MD, and prior CFO; and Rowan Craige, who has held various management positions at Crown since 1993, including most recently as CEO / MD.   Additionally, Woodside's long standing Chairman, Michael Chaney AO will be replaced by Richard Goyder AO of Wesfarmers fame.

Putting aside all of the commentary above, there were many big and small names that released in-line or above expectation figures.  These included GWA (household items such as Corona and garage doors), NIB, Bluescope Steel, Imdex (mining drilling equipment), Ramsay Health Care, IAG, Invocare (funerals), Nine Entertainment, Corporate Travel, Caltex and Greencross (vets).  (Note: not a comprehensive list.)

[1.]  FFO of Funds from Operations is a standard way of reporting profit for REITs, which more accurately reflects the profit earned (by, for example, stripping out one-off property revaluation gains).