Investment Matters

What Matters this week

It was a week to take a collective breath after the last three weeks of reporting season.  That said, there were some developments of interest (all trumped by the US’ and Australia’s pitiful political machinations).

Following Westpac's 0.14% increase to their standard variable rate this week, it wasn't really surprising that the ANZ and the CBA followed suit this week.  The BBSW (bank bill swap rate) has stepped up, reflecting an increasing interest rate environment globally. i.e bank funding costs are going up, and the increases in mortgage rates are not surprising.  But not welcome by the government, and those owing Australia's record consumer debt.

Graincorp (grain/seed transport, logistics and marketing) upgraded its full-year earnings (FY-18 end = 30-Sep-18), supported by good performance in its malt (used for making beer) business and in other operations.  However, the company has warned about tough times ahead with grain volumes expected to be down because of the Queensland and NSW drought.  Investors have their head in the sand, with the company’s share price still above $8.00.  One for the shorters?

Telstra put out an earnings downgrade. It wasn’t that material in the scheme of Telstra’s overall scale, but it does feel a bit like continued death by a thousand cuts. NBN was the driver of the $100m hit to EBITDA (earnings before interest, tax, depreciation and amortisation), with rollout and migration delays.

Sigma Healthcare had a bit of a shocker for its H1 results (half year ending 31-Jul-18). Revenue -2.0% yoy, and profit down 50.6%.  Even “underlying” profit was down 31.2% (and the share price -11.6%).  The company lost its distribution contract with Chemist Warehouse from 30-Jun-19, and Accenture (consultants) has been appointed to help figure out how to grow review, focus on margin, produce stable cash flow and financial flexibility and integrate acquisitions.  (Hmmm, isn’t that what management’s job is…  Bet those consultant fees won’t be classified as underlying either…)

Tollroad near-monopoly, Transurban, continues on unabated by the ACCC’s protestations – successfully conducting a raising to assist the acquisition of a 25.5% stake in WestConnex (motorway in Sydney).

Missing the IM’s radar last Friday was Harvey Norman.   The cows have come home to roost for Gerry Harvey.  The company’s venture into dairy farms (an indulgence driven by the company’s founder) has been to the detriment of all shareholders, as shown in the company’s FY-18 results– and the subsequent discounted capital raising.  Profit down 17.1%, along with big writedowns associated with the dairy JV operations, couldn’t be hidden by the trick of putting the dividend up even though EPS fell.  The share price malaise starting last Friday (-4.5%) continued into this week.

Kogan founders have been selling down, big time.  $40m worth of their shares.  Share price -9.0% post the sales.  Maybe they have a tax bill due, or are taking some profits.  Not sure whether is it negative signalling their belief in the business.  Sounds like the market doesn’t know what to make of it either.

Domino Pizza’s stated they have some administrative errors (i.e. no systemic issues) in the business, despite only 4 of 23 franchisees being found compliant with workplace law in an audit, and being put on formal notice by the regulator.  Sounds like the company’s statements about 20% H2 FY-18 earnings growth.  And we know where that ended up…

And a nice story to finish the week - big-ship builder and success story Austal has delivered its ninth littoral (close to shore) combat ship to the US Navy.