Investment Matters

What matters this week: Q1 soggy (except Woolwoths), NAB and Telstra

NAB was the main surprise of this week, particularly the announcement of a major cost out program.  It released its FY-17 results, with cash profit increasing 2.5% to $6,642million.  Bad and doubtful debts declined 0.01% to be 0.14% of gross loans (which for many is a red flag given mortgage stress is increasing, cost of living is increasing  / wages are stagnant, and household debt is at extreme levels).  As part of a new cost out program, 6,000 people will be made redundant by FY-20, as systems are simplified and jobs automated.  2,000 new positions will be created, probably in IT related activities.  The company also plans to focus on becoming more digital facing with customers, which will involve upgrading technology / software systems.  The market wasn't that keen announcement (-2.8% on the day), perhaps wary of challenges with past bank IT upgrade programs.  And perhaps because the upfront costs will be incurred in FY-18, before benefits (hopefully) come through in subsequent years.

Telstra is the latest name to be essentially calling open warfare (in a diplomatic way) against the NBN, highlighting that the economics of the NBN are "challenging" - and is from the player commanding the highest margins.  At its annual strategy day, some pressure was also noted in the company's mobile services division, along with an acceleration in the decline of its fixed-line revenue.  On the positive, demand for the iPhone8 and iPhoneX are looking to deliver an earnings boost.  The company is looking to fill the gap of traditional earnings with new revenue streams from areas such as IoT (internet of things), 5G, cybersecurity and big data.  Also, it will have ~2500 redundant exchanges in the post NBN world, as well as land and buildings, which it may be able to sell at more than the current book value of these assets.

Fairfax completed its amicable divorce from, with shareholders unanimously voting in favour of the separation.  Fairfax will retain a 60% interest, for the time being anyway.

A number of companies were noting a soft start of to the financial year.  Optimism remains generally on track to meet full-year expectations, but we will see if this lasts.  The companies included:

* Seven West Media - soft ad market in Q1 impacted finances

* Myer - Q1 sales disappointed the market, falling 2.1% on a like-for-like or same-store basis.  (These figures gave further fuel to Solomon Lew [of Premier Investments] in his attack on Myer's strategy and Board.   And speaking of, the strategy articulated in this week's strategy day received the thumbs down from more investors than just Solomon Lew, with the share price falling 4.6% on the day.)

* Amcor - advised it was a challenging Q1, with its flexible packaging division is under pressure because of rising raw material costs and weak demand in emerging markets.

On the other hand, and in contrast to last week's damp squib sales data from Coles, Woolworths released positive sales data for the first quarter.  Like-for-like food sales increased 4.9% as compared to Q1 FY-17. 

Building and construction materials company Boral is benefiting from boom times in Australia, with the apartment cranes still beavering in earnest, and the weather gods smiling in Australia.  Hence Q1 was above the company's expectations.   Not quite so for the US, however, with hurricanes impacting demand in Q1.  Overall, the company is on track to delivery FY-18 earnings expectations (growth across all divisions), including a significant uplift in the US because of the Headwater acquisition completed last financial year.