Investment Matters

Company Profit Reporting Season

Reporting season kicked off for your portfolio this week, with 5 results summarised below.  Next week will be a bumper week and edition of Investment Matters.

Here, There & Everywhere (HT&E) released a solid result, noting the numbers were bolstered by a turnaround in their Hong Kong outdoor advertising business, as well as a materially lower interest charge (post the sale of the Adshel business in Feb-19, the company is debt free).  Net profit increased 23% vs FY-17.

The core ARN (Australian Radio Network) business grew revenue 3%, and earnings (EBITDA) 1% to $84.6m.  The Hong Kong Outdoor business delivered a $1.2m EBITDA (vs an EBITDA loss of $1.8m pcp). 

HT&E noted that the ATO is auditing other matters (in addition to the current dispute regarding NZ operations from Dec-09 to Dec-15).  Provisions have been made, and HT&E ‘remains confident in its position’.

The company also provided a trading update, for the start of the FY / CY-19 – trading has been broadly inline with 2018, with the start to the year being stronger than the 4 months ending last year.  However, caution was noted in regard to the potential impact of upcoming state and federal elections.

IM HTE

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Challenger’s result was inline with expectations set on their market announcement of 23-Jan.  Normalised net profit declined 4% to $200m (vs $208m pcp).  Statutory results were impacted significantly by a -$194m investment experience.

Challenger’s biggest division Life (annuities) had an 18% decline in sales to $2.7b.  Impacts associated with the Royal Commission (especially in relation to financial planning) were noted.  Additionally, Japanese sales were weak.  Your Investment Team will monitor Life sales numbers in coming periods.

COE (cash operating earnings) margin declined to 3.57% from 3.83% in H1 FY-18.  This was driven by lower investment yields.  A more conservative investment allocation has been implemented, with reduced property exposure, higher fixed income exposure, and collar strategy on equity investments.  Overall, Life earnings (EBIT) declined 2% to $278m.

Earnings (EBIT) from Challenger’s Funds Management business declined 4% to $26.1m ($27.1m pcp).  Lower performance fees were a major reason for the decline.

Challenger remains well capitalised.  It is continuing efforts to increase its distribution reach for its annuity products, to tap into the growing need from retirees (please click here).  It is forecasting a full year normalised net profit before tax of $545m to $565m (H1 = $270m).

IM Challenger

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Looking at Aveo’s result at a divisional level:

1/ Development retirement: for major developments (new units), Aveo completed 80 new units in H1, for a gross profit of $6.8m (vs 50 units for a gross profit of $7.5mill for the pcp).  As per FY-18, more units are expected to be delivered in H2 (339).    Aveo had 588 new units available for sale at 31-Dec-18 (vs 570 at 30-Jun-18), with 66 deposits on hand (44 pcp).
For minor development (refurbishments and resale of Freedom units), a decline in the number of units sold (32 vs 75 for the pcp) resulted in a 51% fall in revenue and 55% decline in gross profit (to $6.6m).  There were 12 deposits on hand at 31-Dec-18 (9 pcp).

2/ Revenue from Aveo’s established retirement business increased 3%.  However, decreased unit resales, buybacks and Freedom conversions (down 18% to 323 units) weighed on earnings (EBIT), which declined 9% vs pcp, to $24.1m.  Deposits on hand did increase to 134 vs 61 pcp. Note: the higher deposits on hand reflects longer sales processes / settlement times for residential properties (being sold to fund the purchase of Aveo units).

3/ Non-retirement: Aveo continues to wind up its non-retirement operation, and the declining size is reflected in the results.  Lower lot sales are a function of decreased lots owned, as well as H1/H2 split favouring H2.  Additionally, rental income declined from $5.7m pcp to $0.5m, because of the sale of Gasworks.  All this translated into a 61% decline in revenue, and 73% decline in earnings (to $7.9m).  H2 lot settlements (and thus revenue) is expected to be higher than H1 (79), as contracts on hand at H1 close was 140.

Overall, this translated into a material decline in H1 profit (vs pcp), but with H2 expected to be stronger on many fronts (e.g. development units to be delivered, settlement of established and minor development units, and higher non-retirement lot settlements).

Net tangible assets (NTA) per security was $3.83 at 31-Dec-18, which was lower than at 30-Jun-18 ($3.92), due to a more conservative assumption regarding future property prices.

In regard to cash flow / balance sheet – Aveo is considering instigating a security buyback from May-19, instead of progressing with the FY-20 development pipeline (with the buyback looking to be materially more financial beneficial for securityholders, given the depressed security price vs NTA).  Gearing is also comfortable at 19.7%; set to decline in H2, with the ability for Aveo to balance it with the buyback and ongoing development spending.

IM Aveo

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For Suncorp’s General Insurance division, Gross Written Premium (GWP) – somewhat akin to revenue – rose a moderate 3.0% for Australian operations, and 8.1% for the smaller NZ operation.  Natural hazard events (as forewarned in an announcement on 3-Jan-19), along with lower investment returns, impacted profit for Australia (-43.2% vs pcp).  NZ partially offset this, with strong profit growth in a benign weather environment.

Earnings from Suncorp’s Bank division were down a touch (-1.1%).  Lending growth was below average, and net interest margin (NIM) was under pressure due to higher interest rates (BBSW) and price competition.  This points to below-average lending growth (and associated earnings) going forward.  On the flip side impairment losses were very low (we will be monitoring the sustainability / reality of this in coming periods), and operating expenses are well contained whilst also making investments (e.g. in digital).

Overall, profit (continuing operations, i.e. excluding the Life insurance business sale which is slated to settle soon) declined 9.3%.  The company has noted higher regulatory spend than initially planned over FY-19, and continuing into FY-20 (e.g. response to the Royal Commission).  It is also taking steps to better manage it natural hazards exposure.  Suncorp remains well capitalised, and provides a good yield.

IM Suncorp2

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Healius, formally Primary Health Care, is undertaking significant investment (from IT systems, day hospital acquisition and integration, new streams [e.g. dental and IVF], to cross-selling initiates and efficiency measures).  It is 12 months into its change agenda.  When looking at financial trends within the business, key markers (e.g. GP recruitment) and expected efficiency savings (quantified to be $10m EBIT for H2 FY-19), there is confidence this investment will deliver financial benefits to shareholders in the future.

Also of note was that Healius experienced soft conditions in H1, as seen by lower volumes.  It advised a benign flu season was in part the cause of this.

At a divisional level, Medical Centre’s revenue increase 6.2%, however earnings (EBIT) declined 8.2% to $17.9m (but this was a significant improvement, +50%, from H2 FY-18).  Spending on investments, e.g. dental, IVF and day hospital integration, impacted earnings.  99 GPs were recruited over the half year; a 48% increase on H1 FY-18.  Recruitment in Jan-19 was also good.

The Pathology division increased revenue 3.3%, with earnings declining 14.6% to $45.2m.  Revenue growth was moderate due to soft volume growth (driven by outside factors such as the benign flu season).  A labour cost increase and loss of a bowel screening contract impacted earnings in H1.  Productivity programs are being implemented to offset the labour cost increase.  Also of note was the step up in capital spending for this division.

The Imaging (radiology) division grew revenue 8.7%, and earnings +12.8% to $18.5m.  New sites and services such as MRI and CT supported growth, helping to offset soft conditions (lower than average market growth).

Healius has forecast underlying NPAT between $93m and $98m for FY-19 (vs $39.4m in H1). 

IM Healius

- Fleur Graves