Investment Matters

What Matters this week

In a week where a lot of external factors have left the market in a state of quandary (North Korea tensions, US corporate tax and healthcare developments, German election and significant EU speeches, commentary from US Federal Reserve members, and a bizarre early end to the week for some in Australia), there were not many significant corporate developments in Australia.  The main news pertained to retailers and gas.

Premier Investments released their FY-17 financial results for the year ending 29-Jul-17, with sales up 5.7% and underlying profit up 5.8%, as compared to FY-16.  But it it wasn't quite as glossy once the surface was scratched, with like-for-like sales up 1.1% on a constant currency basis, and core brands such as Portmans, Dotti and Jacqui E struggling - which reflects tough retail conditions and brand positioning / offering.  Power brands Smiggle and Peter Alexander continue to do well, with quite aggressive expansion plans (including overseas) over the next few years.

Premier's Chairman Solomon Lew (Premier owns a 10.8% 'strategic' stake in Myer) had a go at Myer's new clearance strategy.  It has also publically requested details of the shareholders on Myer's share register, with the apparent aim to shake things up at the Myer's upcoming AGM.

Another retailer reporting this week was Kathmandu.  Sales increased 4.6%, and net profit +13.5%.   Like-for like sales increased 5.5%, with Australian stores being the driver (+7.9% sales growth).   It is also doing well operationally, considering factors from inventory position to gearing.  The question is how much sales growth the company is able to obtain from here.

Agrichemical company Nufarm reported good revenue and underlying profit growth (+11.5% and 25% respectively), in line with expectations.  Operations in Australia, North America and Asia drove the result (reflecting good farming conditions over the period).   The company's balance sheet seems a little stretched, with intentions held to make acquisitions.  Cash flow generation was also poor.

Oil Search (part owner of APLNG, a LNG producer in PNG) has had a bit of share register shakeout, with the PNG government fully selling it's holding (originally 10% of the company).  Some analysts and commentators are indicating that this has removed a share price overhang, and potentially opens the company up to being acquired.

Also on the energy front, but closer to home, AGL has released a plan to replace the generation capacity from the ageing Liddell power station with a mix of renewables, battery storage, new gas fired power stations, and an upgraded coal-fired (Bayswater) plant.   AGL stated the bulk of Liddell's replacement capacity can come from new renewable projects, and they have assessed this is the most cost effect option.  It advised the reliability issues / likelyhood of unplanned outages, along with the cost of extending the life of the Liddell power station, means that extending its life does not make sense.  One can only imagine how unimpressed the Australian government is.  Particularly those on the right.

And speaking of the government.  The major gas producers (Origin Energy, Shell and Santos) were marched to Canberra again.   It came after the ACCC assessed there was a domestic gas shortage between 54PJ and 107PJ for east coast users over the next 2 years.  Producers agreed to quarantine gas for domestic use in 2018, reflective of the indicative shortfall and at global prices (adjusted for transport).