Investment Matters

Company Profit Reporting Season Wrap Up

Overall, results over reporting season were muted, albeit in line with modest (and downward revised) expectations.  Australian industrial companies (ASX 200 ex resources) grew their profits by 1%, in line with expectations (down from expectations of +4.7% earlier in the year) (Source: Morgans).  Overall, earnings for the market were largely lifted by a handful of sectors, with earnings contracting 3% in the absence of a contribution from Financials, Utilities, Resources and REITs.

With respect to the outlook for the market, there were several downgrades to expectations for next years’ earnings.  Given the current economic uncertainty, there was hesitance from some to give guidance.  The number of downgrades was pronounced, with the ratio of downgrades to upgrades for FY-20 earnings per share expectations at 7 to 1.  As such, expectations for earnings growth (for the ASX 200 ex resources) in FY-20 declined from 8.3% to 6.2% since August (Source: Morgans).  Notably, global uncertainty weighed on the outlook for companies with exposure to overseas markets.

We continued to see the market willing to pay high multiples of earnings for companies in sectors that are expected to show resilient growth, particularly in the IT/Software, Online and Healthcare sectors (both in absolute terms and relative to their history).  These companies remain at risk of disappointing.  Those that did disappoint were heavily penalised this reporting season.

In contrast to the market, we saw that guidance for a majority of our companies was as expected and overall did not suffer downgrades of a similar magnitude.

table of FS
For further details on the results from your companies, please refer to previous week’s updates.
Some results that were of note:

The good

Origin Energy’s underlying tax profit in FY-19 was $1,028m, which represented a 42% increase in comparison to the previous year.  This was driven by its Integrated Gas Division (APLNG), which generated net cash of $943m.  Along with increasing its production forecast for FY-20, the company has detailed plans to drill two horizontal wells in its highly prospective Beetaloo Basin tenement.  As anticipated, the company is now in a position to pay a meaningful dividend, announcing it will pay 30-50% of its free cash flow to shareholders (excluding major growth projects and less interest paid).

QBE delivered a strong result which reflected the flow-on effects of their Brilliant Basics and “Cell review performance improvement programs (which have focused on simplification, pricing, risk selection and claims management).  The profitability of the company’s underwriting activities improved (with cash net profit of $520m vs $385 in the pcp), along with investment returns for the period (+6.8% vs the pcp including mark-to-market gains of +2.1%).  As such it delivered a cash profit of US$520m for 1H-19 in comparison to US$385 for the previous comparative period along with an increase in its dividend.

The bad

While Pact Group’s results for FY-19 were in line with expectations, the company’s outlook for FY-20 was conservative, with a modest improvement in EBITDA forecast for FY-20.  This largely reflects the impact of its ongoing efficiency program and near-term challenges to its contract manufacturing business, as it works through a period of transition.

Challenger’s result was in line with expectations; however, it delivered a higher dividend than anticipated.  The company continued to experience slow growth in sales of its annuities in the second half of FY-19 (primarily due to the significant disruption that has occurred to the advice industry and slowing sales in Japan).  The company has thus guided towards profitability in FY-20 that is broadly in line with FY-19 as it works towards adapting to these changes.