Investment Matters

What matters this week

The company of the week was the CBA.  It's profit result was overshadowed by furore about the breaches of AUSTRAC regulations.  CBA tried to say the 53,000+ breaches were really just one because they originated from the same software code.  Nope.  Sorry.  Doesn't even come close to passing the pub test.   Breaches should obviously apply at the transaction level.  And the Board cut short term bonuses for senior management and cut directors fees by 20% for FY-18.  Whoop-de-doo.  Such an insignificant penalty on management and board members is in effect thumbing their nose at the magnitude of what they have done, and the anger about it.

And hot off the press - ASIC is considering taking action in relation to a breach of directors duties, including to protect the company's reputation.   The regulators appear to (rightly) have had enough.

The company's FY-17 result was pretty good.  Cash profit increased 4.6%, or 3.4% on a per share basis, and the capital position (CET1) was marginally weaker at 10.1% (as compared to FY-16).   Bad and doubtful debts remain low, and volume growth in home lending increased - both of which are unsustainable.  Mortgage repricing will provide some benefit in the coming year (especially on investment loans).  However, the systemic issues facing the big banks (technology, credit growth, resi housing market, regulatory capital requirements etc) loom large.

Moving on to other matters...

Reporting season continued in Australia.  Let's break it down to:

1/ The good

carsales, online vehicle classifieds, released a strong result.  Private sale listings were the standout, with revenue and underlying profit both up 8%.

And following the car theme, the toll road operator Transurban grew average daily traffic by 4.0% and toll revenue by 10.6%.  The distribution to security holders increased 13.2% over FY-16 and is forecast to grow a further 8.7% in FY-18.

AGL's result for FY-17 was slightly ahead of expectations, equating to a 14% increase in underlying profit vs FY-16.  Wholesale electricity prices were noted as a contributor.  It is forecasting underlying profit growth between 17% and 30% for FY-18, which is sure to go down like a lead balloon in Canberra (and other places too).

2/ The okay

Results were in line with expectations for NewsCorp, packaging company Orora (but it flagged increasing electricity costs as a concern), and Aristocrat Leisure (gaming machines, also with an increasing online offering).

3/ The bad

Baby Bunting slightly disappointed on its very lofty growth expectations.  REA Group (realestate.com.au) missed consensus profit by ~5%. 

For AMP, the headline numbers looked okay.  However, it was one when you scratched the surface it was not as pretty - particularly in relation to its core wealth management business. 

Virgin Australia's result was looking much better if you look through airline-only investment goggles.  Yes, things are improving (including the demand outlook) and the balance sheet is a little better, but it still is making a loss, and being cash flow positive is a long way off making a profit for the shareholders and generating an adequate return on capital. And...

4/ The Ugly

James Hardie, a provider of building products such as fibre cement, released its Q1 FY-18 results (ending 30-Jun-17).  This showed a profit collapse of 34% vs pcp.  It also released FY-18 profit guidance, which disappointed the market.  North American operations are more challenged than those locally.

Other news of the week was Westpac's $40m investment in zipMoney, the online purchase financier.  Expect to hear about such investments and acquisitions by the big 4 more often, along with a ramp up in their IT spend, to respond to the digital disruption they are increasingly facing.

And finally - for those that have following the trials and tribulations of the troubled Bellamy's - the Chinese regulatory approval on the canning plant it purchased was reinstated.