Investment Matters

What Matters this week

Some snippets of What Mattered last week:

Westpac (-1.5%) surprised its shareholders on Monday by announcing a $2.6 billion capital raise. The raising, which was conducted at a 6.5% discount to the company’s last traded price, came after the company announced an additional $341m in remediation costs late last month. The capital will serve as a “buffer” above its minimum APRA mandated tier 1 capital ratio (and perhaps is in anticipation of further remediation costs in the future?). In the vein of ANZ last week, it also made the boldly unpopular move of tinkering with its dividend: cutting it by 15%. This was in addition to a rather weak second half result (1.5% below analysts’ estimates), with net interest margins continuing to contract, loan growth flat, total revenue flat and costs rising. This was greeted with as much fanfare as you would expect.

Despite market speculation, NAB (+0.0%) shareholders were spared from a capital raising last week. The company did, however, institute a discounted dividend reinvestment program - which means it will effectively raise approximately $1.55 billion, although at a lesser discount to Westpac (1.5%). Its result was also weak, with net profit growth which was 2% below analysts’ estimates. Of note was its non-performing loans, which rose by 14 basis points due to increased mortgage delinquencies - with housing arrears rising in every state.

Retail sales figures may indicate that households are becoming more financially stressed. This was reflected in retail sales growth of 0.2% for September (on a seasonally adjusted basis), with volumes down 0.1%. As perhaps was foreshadowed last week by property group GPT’s result, clothing, footwear and personal accessory retailing sales were particularly weak, declining by 0.5% on a seasonally adjusted basis, with department stores sales falling by 0.2% and household goods retailing remaining flat (despite our population growing over the period).

The slump in retail sales was also evident elsewhere. In what may be a bell weather for retail property values Australia-wide, Lendlease (+0.2%) announced that it has sold its half share in Adelaide’s Westfield Marion for $670m. The property group was forced to sell the property to fulfil almost $2 billion of redemption requests from its unlisted retail fund. The sale price represented a discount of more than 9 per cent to its stated book value of $737.5m (in April).

However, buy now pay later providers continue to thrive despite the lukewarm retail environment. ZIP (+5.8%) announced a strategic agreement with Amazon Australia which will see it become Amazon Australia’s first instalment payment option. To cement the deal, ZIP will issue up to $14.6m in warrants, at an exercise price of $4.70 to an Amazon affiliate which will vest based on the achievement of volume hurdles. The market took the deal (announced at a time when ZIP’s share price was $3.44) as a huge vote of confidence, propelling the company 16% higher on the day. 

This week's Matters:

Trading conditions remain tough for Domain, although its share price would indicate otherwise (+7.7%). Digital (online, non-print) revenue for the company was down around 8% for 1Q FY-20 vs the previous comparative period. This, however, was reasonable considering Sydney and Melbourne's listings were down by double digits over the same period.

There was further confirmation of what appears to be a stagnating advertising market.

Nine Entertainment (-6.5%) (which has a ~60% stake in Domain) downgraded its expectations for operating earnings (EBITDA) by 10%. The company pointed to weakness in auto, government, bank and gambling advertising. This weakness was predominantly in the free to air market, with revenue continuing to fall despite signs of a resurgence at the end of the September quarter and gains in market share.

Unsurprisingly, Seven West Media (-8.7%) followed with a similar downgrade, with softness in the metro television market leading the company to indicate it expects its earnings to be at the lower end of what it had signalled to the market.

Lastly, G8 Education (-17.4%) surprised (some, not all) by issuing yet another downgrade. Having previously guided towards an EBIT range in CY-19 of $140-145m the company is forecasting profit of $121-134m (-10.5%). Occupancy of its childcare centres is expected to grow by 1% (less than the mid 1% range forecast), resulting in expectations of $7m less in revenue, while wages are expected to be $3m higher than forecast.

Note: Price changes represent performance for the week to market close on Thursday afternoon.

- Paul Grace