Investment Matters

What matters this week

Reporting season kicked off this week, with results early in the week hopefully not a pointer to things to come.  The notable negative was the education services' provider, including pre-uni colleges, Navitas.  It also noted headwinds it is facing (including the loss of an English language contract with the government).

In retail land, Amazon was making the headlines again, with the announcement of a CEO for its Australian operations, and a fulfilment centre (aka warehouse with technology) in Melbourne's east.  Also, Kathmandu released a positive trading update.  It seems the cold nights (and days) are paying dividends for the company.  Net profit for the year ending 31-Jul-17 is expected to be up 13.4%, with sale store sales (constant currency) up 5.5% year-on-year.  In contrast, Australian Pharmaceuticals (Priceline and Soul Patterson pharmacies, along with pharmaceutical wholesale distribution) cited difficult retail trading conditions including weakening like-for-like sales, for a reduction in its earnings expectations for FY-17 (ending 31-Aug-17).

In travel land, Webjet started the week under a bit of a cloud, with an accounting issue and an associated highly unusual dispute with its own auditor.  Things turned around later in the week as it conducted a capital raising to assist funding the acquisition of a European-based B2B (business-to-business) travel business.  This was well received by the market.  Webjet wasn't the only travel company on the acquisition war path - Flight Centre made two acquisitions in NZ (one leisure, and one corporate), and another diversified player in Canada.

Resmed released a tough quarterly report.  The sleep / breathing devices company's revenue and sales growth were solid, but a number of one-off factors buried in the accounts (litigation settlement, restructuring and acquisition costs) dragged the profit down for FY-17 (as compared to FY-16), which also dragged the company's share price down.

Housing prices / bubbles/ debt related headlines continued with earnest in the press this week.  The mortgage insurer Genworth noted that measures to reduce the number of high LVR (>80%) loans are actually increasing risk in the system, as people scrimp everything and load up credit cards to get their 20% deposit, then can't afford to pay everything back in the early mortgage years.  The company also advised it is expecting a marginal (0.5%) increase in H1 FY-17 (ending 30-Jun-17) underlying profit - as it is facing increasing delinquencies, and lower demand (for insurance on the lower number of high LVR loans).  And the latter is where the tad of self-interest comes in in relation to their earlier risk comments.

Media laws are apparently back on the legislative agenda again.  The politics of this are fraught, and cross bench cats difficult to herd.  So we will see where this ends up.  [Changes in relation to this would generally be viewed positively for Southern Cross Media, which many clients own in their equity portfolios.]

Rio Tinto is bounding away on the back of the strong iron ore price (it released its H1 FY-17 results this week).  The company is in good shape with low debt, strong productivity gains (feeding through to cost of production), capex under control, really strong cash generation, a share buyback in place, and a larger-than-expected dividend.

To wrap up the week, Crown released a FY-17 result marred by lower VIP income in particular (on the back of the China issues and arrests).  Net normalised profit fell 15.5% versus FY-16.  Asset sales (Melco, ~$3.1b of proceeds) contributed to lower debt levels [some clients own the Crown hybrid CWNHB, which benefits as the debt risk profile and balance sheet of Crown itself strengthens].

And finally, WOW CBA!  Working at First Samuel (we are a financial services firm), obligations re money laundering / terrorism financing are hammered into us. As Wry & Dry has noted elsewhere, seemingly, CBA has designed an ATM functionality that is inherently highly susceptible to allow breaches of these obligations, and on a massive scale.  Then it seemingly hasn't monitored use (or abuse) of the system, or transactions done using the system.  And THEN seemingly it has put its head in the sand, perhaps for years, once Federal Police have highlighted to them that they have potentially contravened their obligations.  If all these are proven true in court, then perhaps CBA shareholders shouldn't be surprised when the CBA receives the one of the biggest, if not the biggest fine in Australia, and one of note in relation to its size globally.