Investment Matters

What Matters this week

What Matters was busy (more so than usual) this week, with 53 companies within the ASX200 reporting their results for the first half of FY-20.

But, once again, it was the more unexpected announcements that caught our attention.

For instance, Treasury Wine Estates (-5.4%) lost one of its few remaining, large active institutional shareholders. Capital Group, a US-based asset manager with approximately $2bn in assets under management gave notice that it ceased to be a substantial shareholder (that is, own greater than 5% of the company) on the 5th of February – a week after the company issued a significant downgrade to its earnings. And it wasn’t just a trim – the fund now holds zero shares.

Similarly, vitamin manufacturer Blackmores (-18.1%) was placed in a trading halt on Monday. Adding to what has been a terrible few years for shareholders, the company hit shareholders with a triple whammy: 1. Unexpected costs as part of the acquisition of its Braeside manufacturing facility ($13m) 2. A looming $11m contingent liability surrounding trade exemptions 3. A Coronavirus (now officially “COVID-19” – thank you WHO) related downgrade. The cumulative effect is that net profit after tax is expected to be between $17m - $21m, vs $53.5m last year.

It was also a week where several companies priced based on high expectations….met these expectations and where others that did not rallied regardless.

The first was JB-Hifi (+3.1), which had a solid showing, with revenue growth (of both JB-Hifi and The Good Guys) exceeding expectations, cost of doing business declining and a subsequent improvement in its operating margins and net profit. Its stock thus maintained the circa 60% rise in its price it has seen over the last 12 months. The company has benefited from an improving housing market and the still somewhat dormant state of Amazon in Australia. This, of course, was terrible news for the 11% of the register that had short sold the company’s shares (effectively bet that the company’s share price would decline), in the short term at least.

CBA (+6.0%) also managed to hold at its current valuation. The bank experienced higher than industry levels of loan growth (+4% in home lending, +3% in business lending – partly due to the level of service it provides brokers), maintained its margins (group NIM at 2.11% + 1bpt on the previous half – largely due to not passing on rate cuts for almost a month.) and is sitting pretty when it comes to its capital position, signalling potential for some capital management in the near term. Likewise, NAB (+4.3%) delivered a slightly higher net interest margin. However, future margins look seriously challenged, with costs rising for both banks and recent/potential future interest rate cuts making some compression somewhat inevitable.

Likewise, CSL (+3.1%) showed strength, largely driven by strength in Immunoglobulin sales (given competitor supply challenges) and its vaccine division.

In contrast, last Friday REA Group (-2.0%) delivered what was a miss to results (revenue -6%, operating profit -7% vs previous comparative period) and downgraded earnings expectations (not to mention we are yet to see a recovery in listing volumes) yet its share price managed to finish the day 3% higher. Its share price vs earnings per share estimates provide for an interesting, if not slightly puzzling chart:

Source: Reuters

And lastly, shares in TPG (+7.0%)and Hutchinson Telecommunications (+3.5%) rocketed, as the Federal Court approved the proposed merger of the two Telcos, concluding it will, in fact, boost competition (?). This is despite the ACCC concluding the merger would reduce competition and that the merger prevented a “once in a generation” opportunity for stronger competition in May of last year. The ruling centred on David Teoh’s (TPG) ability to make a case that the company would not roll out its own mobile network if the merger did not proceed. The court decided to take the word of the “unconventional” Mr Teoh as well as his assertions that there was little documentation or formal analysis involved in his decision to roll out a Huawei backed network in 2017. The general public may be a little more sceptical.