Investment Matters

What Matters this week

What mattered this week? – Reporting season started.  It was with some joy that your Investment Team welcomed the start of reporting season.  It is nice for the focus to be on what it should be: individual companies (rather than the gyrations of trade wars / Trump / Brexit etc, etc).

CBA’s half year FY-19 result was overshadowed by the Royal Commission final report release and subsequent inevitabilities, e.g. resignation of NAB’s Chair and CEO (for more on this see W&D).  It was a soggy result – operating income (revenue) declined 4.2%, and the cash profit (i.e. skipping out all of the one-off nasties, including from the Royal Commission) of $4.68 billion was a 1.7% increase vs pcp (but this is quite generous; it was a negative print when discontinued businesses such as Colonial First State are included, and additionally loan impairments remained benign).

AGL’s underlying profit grew 10.3% in “challenging operating conditions” and from flat revenue.  (Wonder what "non-challenging" would equate to?)  Yes, retail (Consumer Markets) margins declined (i.e. government pressure on bills seems to be having some impact).  However, this was nowhere nearly as significant as the increase in electricity generation (Wholesale Markets) margins, and thus profit (where arguably a government climate change policy would have an impact).

Property manager and developer Mirvac released a good result.  Breaking down the assets in Mirvac’s investment portfolio: Retail (shopping centres) and industrial assets performed acceptably and well respectively.  Office is seeing favourable conditions in the Sydney and Melbourne CBD markets in which it owns assets, and Mirvac is progressed its $3 billion office development pipeline.  And a lot of focus was put on their residential development pipeline: conditions haven’t materially impacted to date, but there are indications for caution e.g. number of pre-sale contracts, seeing signs of financing getting harder.  Overall operating profit was 26% higher than the pcp.

There were some industrial companies that released results.  Of note: Downer EDI (building and maintenance in the rail, mining and infrastructure sectors) messy but mostly okay [-4.6% on the day of the announcement], and CIMIC (formally Leighton’s, construction and services in the infrastructure, property and mining sectors) in-line result at headline level, but some weakness might be creeping into non-mining construction [-0.2%].

Staying on the industrials, perennial disappointer Boral (building products) did guess what?  Disappointed again.  It downgraded FY-19 earnings expectations by ~5%, driven by rain in the US and project delays in Australia.  The share price was downgraded too, by 7.9%.   James Hardie’s (manufacturer of fibre cement products) Q3 has it on-track to meet full year expectations.

IAG was the first of the insurers to release its H1 FY-19 results.  IAG retains a strong capital position, and delivered a small special dividend in addition to the standard one.  Gross Written Premium (GWP) – in some ways akin to revenue – increased 4.1%, driven primarily by policy price increases. Insurance margin was hit by perils exceeding allowance (i.e. storms etc cost more than reinsurance provisions), to be 13.7%.  IAG is banking on this not occurring in H2, to achieve its full year guidance for a margin of 16-18%.  But given it is priced for perfection, expect a share price tumble if it doesn’t.

And to wrap up – two results that sparked interest were IDP Education (overseas student placement and English testing) and CYBG (banking services in the UK including Clydesdale Bank, spun off from NAB).    IDP H1FY-19 result exceeded analyst expectations meaningfully (EBITDA +33% vs pcp).  CYBG’s Q1 seems to indicate a positive start to FY-19, after FY-18 was impacted by legacy conduct costs (UK’s PPI scandal; Australia isn’t the only one with bank conduct issues …).  Share prices increased 21.2% and 17.9% respectively on the day of their announcements.

Hot off the press: REA Group (owner of realestate.com.au and other Australian and overseas websites) released their H1 FY-19 results.  It was a great result, with a big 'but'.  Revenue increased 15%, and net profit grew 20% to $176.6mill versus the pcp (excluding a $173.2mill impairment charge).  But listings in Australia (the major earnings driver) decreased 3% on average - price increases drove the revenue and profit increase.  H2 didn't start well either, with residential listings down 11% in January.  The risk is further major price increases, in an unfavourable environment, are unlikely to be sustainable.

Next week reporting season ramps up, including results from a number held in your equity portfolio (Challenger, Aveo, Suncorp and Healius).

-          Fleur Graves