Investment Matters

Company Profit Reporting Season continues

Coronado’s result confirms that the company essentially met or exceeded its FY-18 target, as articulated in the listing prospectus.  Furthermore, it is on track to meet FY-19 guidance, also provided in the prospectus.  The company produced 20.2Mt of coal in FY-18, with sales of 20.1Mt (of which 15.8Mt or 78.6% was met coal, used in the manufacture of steel).

The dividend was higher than we expected, including a special dividend.  At US31cps or ~AU43.7cps, vs a share price of $3.52, it represents a 12.4% dividend yield.  High dividends are expected to continue, supported by strong cash generation from its assets.

Also of note, there was a small production upgrade for FY-19 (was 21.6Mt, now 21.6 – 22.0Mt).  And it upgraded reserves at its Curragh mine.

Note: Coronado financial results have been presented to better represent performance of the company, noting its listing on 23-Oct-18.  Prospectus numbers are the expectations that were set at the time of listing.

IM Coronado

***

Emeco delivered a strong result, with revenue +31.0%, operating utilisation at 64% (57% H1 FY-18), and an operating EBITDA margin of 45.8% (39.2%).  Along with contribution from the Force and Matilda acquisitions, this culminated in an operating profit increase of 159.8% to $31.7m.

However, the company surprised the market (and us) by announcing a major investment – the acquisition of additional equipment (mainly 240t trucks and D10/D11 dozers; 35 pieces).  Additional information was provided on the day subsequent to the results release.  The purchase prices was $67m, plus $18m-$23m of expected preparation costs.  An expected full year $25m EBITDA contribution from FY-20, and ~10% EPS earnings accretion in FY-20, means that the acquisition has favourable financial metrics.  The equipment type is in demand from customers, with rental agreements already in place for many of the assets.

Emeco has delivered a strong operational performance – albeit the not ideal communication to the market impacted the share price in the short term.  However, with operational performance clearly translating into strong financial performance in H1, and a very positive growth outlook (now heightened further by the additional equipment), we expect Emeco’s share price to move closer to its intrinsic value with time.

IM Emeco

***

BHP released a solid result.  There were some operational issues in the half (e.g. major train derailment, Olympic Dam processing issues).  But the company still delivered strong profit of US$4.0bill, supported by generally buoyant commodity prices.  The result was slightly below market expectations (excluding the dividend, which was slightly above).  However, a higher iron ore price is expected to boost H2, and therefore expectations for the full year are on track.

The company emphasised its strong capital position, with plans to spend up to US$8bill capex p.a. until FY-20.  It also reinforced its intention to ensure it uses its capital with a disciplined approach (after past disasters such as US onshore, and buybacks at high share prices). 

Following the sale of the US onshore assets, 41% of BHP’s earnings come from iron ore, 22% from petroleum, 19% from coal and 18% from copper.

IM BHP

***

Cardno’s result was disappointing.  On the positive side, revenue increased 10.4% and backlog (future contracts) grew by 24.1% - due the award of international development projects, the inclusion of backlog from acquisitions, and organic growth.  This points to revenue growth in future years.

Your Investment Team was expecting more progress to have been made in regards to the related factors of cost control and margin improvement.  EBITDA and profit declined materially as a result of margins not being adequate in their largest divisions.

Margin in the Americas [$9.4m EBITDA] operations did improve somewhat to 4.5% (EBITDA), but are still below what will ultimately provide an adequate return for shareholders.  International Development [$1.0m] margins declined to 0.6%.  Construction Services’ [$7.6m] margin was good at 10.0%, and Asia Pacific [$7.6m] (including Australia) was 5.9% - considerably lower than historical levels and where we would view as an acceptable level.

Management indicated an intention to grow EBITDA (and thus profit) in the medium term.  It articulated the focus areas for the remainder of FY-19, included a pricing model for margin management.  We look to see improvement in the margins coming though in H2.

IM Cardno

***

Pact released a poor result.  It reflects a really tough trading environment, as well as input prices (e.g. resin and electricity prices) dragging margins lower.

Revenue increased 13%, supported by past acquisitions.  Underlying revenue growth was 1%, with higher prices mostly offset by lower volumes.  Net profit declined 29% to $35.7mill.

Pact is clearly under-earning off their assets.  A new CEO is expected later this year.  The company is also accelerating operational improvement programs, taking steps to improve margins, and continues to improve the cost base (which hasn’t been evident in the financials yet).  We expect some moderate improvement in H2, supported by these measures and other past actions (e.g. plant closures).

The dividend has been suspended in H1, as capital priority is put to the balance sheet (gearing was higher than ideal at 31-Dec-18).  We will not be surprised if a discounted rights issue is conducted in due course, and have factored this into the investment plan.

The market has de-rated Pact’s share price, even in the context of current earnings.  That is, considerable downside in relation to Pact has been factored in (including a possible rights issue), with no assumption of any upside.

IM PAct***

WorleyParsons’ result was positive, especially in regard to the uptick in contracting and activity being noted across the sectors they operate in.  Backlog (future contracts over a 3-year period) further increased 10% to $6.6bill, and the number of awards in H1 was the highest for 10 years.

For H1, revenue increased 11.1% and underlying profit increased 25.8% vs H1 FY-18.  Improving conditions, along with contribution from a UK-based acquisition assisted the increases. 

The Jacobs ECR acquisition is on track for completion in late March or April.

WorleyParsons noted continued improvement in market conditions, as resources and energy customers are increasing activity for the next cycle of investment.  Earnings are expected to be weighted to H2, and the full year will deliver earnings growth (as compared to FY-18) – before contribution from Jacobs ECR.

IM WorleyParsons***

CML Group released a good result, with strong revenue growth in its invoice financing business, and in its recently created equipment finance business.  This translated to earnings growth in both divisions, with equipment finance now delivering positive earnings (ahead of expectations).  A lower cost of debt also benefited the bottom line, with net profit and EPS (underlying) 71% and 45% higher respectively than the pcp.  The dividend was consequently increased 33% to 1cps.

IM CML

***

Origin Energy released a good result.  Underlying profit increased 53% or $204m to $592m.  Profit from the APLNG project was the major contributor to the growth.  Lower interest costs and a small increase in earnings from Energy Markets (due to gas sales) also contributed.

Origin did see some pressure in its retail operations.  This included lower customer numbers, and pushback in relation to retail costs (which is resulting in government response such as a default market offer, and price relief measures).

Origin reinstated its dividend, and a dividend policy will be announced at the full year result in August.  With the investment in APLNG now complete and strong free cash generation, we expect good (and fully franked) dividends to be generated in the future.

Guidance for the full year was as expected for both Energy Markets and APLNG – for the former earnings (EBITDA) was unchanged from prior guidance, and for the latter guidance is in line for production volumes and cost / boe.

IM Origin

***

Southern Cross Media’s revenue at group level was flat.  Underneath, strong growth (+3.8%) in the larger Audio (including metro and regional radio plus podcasting) division, was weighed down by a 7.1% decline in Television revenue. 

Audio’s costs were well contained resulting in earnings growth of 7.3%.  Regional radio stood out, with management’s efforts to expand national advertisers into regional stations bringing benefits. 

Television was impacted by the loss of cricket telecast (but will benefit from Tennis coverage in Q3).  Expenses were well contained, but earnings declined 8.9% as a result of the lower revenue.

Overall, net profit (excluding a writedown in the value of their Television licences) increased 5.4% vs pcp.  The dividend was held constant as the company further strengthens its balance sheet (to a gearing of 40.0%).

Southern Cross was quite upbeat in relation to the outlook, with trading in January and February slightly ahead of last year.  The potential impact of the upcoming election was noted, with increased in election-related spending expected to partially offset lower general advertising spending.

IM SC

 - Fleur Graves