Investment Matters

What Matters this week

We reached the pointy end of reporting season, with a congested week of results. The market delivered some significant price moves - with several companies re-priced by more than 20% (highlighting that market expectations have been significantly out of line with operating performance).  Furthermore, special dividends were the flavour of the week (given Labor's proposed franking credit refund reform.  For more on how this may impact you please click here).

Some high(/low)lights:

The word Bingo (-49% on the day of announcement) did not have investors jubilantly jumping out of their seats on Monday.  The waste management company downgraded its FY-19 outlook by 15-20% as it felt the pinch from slowing construction in Sydney, with a significant drop in Building & Demolition collections.

Likewise, Blackmores (-25% on the day of announcement) kicked off the week by tumbling 25%, on the back of softer Chinese demand.  Sales in China were down a whopping 11%, with net profit for the half year flat.  The company blamed Chinese demand being diverted through Australian channels (otherwise known as the Daigou trade), estimating Chinese sales grew 8% after taking this into account (although they don’t benefit from higher margins through this channel!).

Beijing’s other foster child, a2 Milk (+11% on the day of announcement) fared far better, shrugging off any sentiment around slowing Chinese demand by posting a 53% increase in operating profit.  Revenue was led by 83% growth in Chinese label infant formula sales.  How long they will be able to ride this wave, and how investors will react when expectations inevitably meet reality (see Blackmores above) is anyone’s guess.

The only positive about Domino’s (-3% on the day of announcement) performance was that it was consistent ... with its trend of over promising and under delivering, as it downgraded its number of promised stores to 200-215 (from 225-500) and pointed the lower end of its guidance.  Given the number of roll outs in the first half and their track record, even these numbers look doubtful.  Makes you wonder why investors keep coming back for another slice …

The market downgraded Cochlear (-8% on the day of announcement) after sales slowed in its primary US market following a competitor product launch and healthcare budget constraints in Europe.

IOOF (+16% on the day of announcement) lifted after signalling a $20-30m programme to review its financial advice services, while independent wealth management platform Netwealth (+7% on the day of announcement) rallied as funds under administration continue to grow in line with guidance and it made assurances that margins will be maintained at FY-18 levels despite fee pressure.

Qantas (+1.9% on the day of announcement) posted a drop in underlying net profit of 19% which was respectable given the $400m headwind it faced from higher fuel costs over the period, while online travel agent Webjet (+30% on the day of announcement) delivered on its recent acquisitions, posting an increase in underlying operating profit of 42% (organic revenue growth up 21%, operating profit up 10% after adjusting for acquisitions).

Fellow travel service provider Corporate Travel Management (+15% on the day of announcement) posted a respectable result, with underlying operating profit up 21%. Much to short-sellers’ chagrin, 80% the company’s growth was organic (helping allay fears about its ability to growth without acquisitions) which helped it gain back some of the ground it lost last year.

Wesfarmers (+7% on the day of announcement) treated its shareholders to spoils from its recent divestments by doubling its dividend.  Its headline result was pleasing, with net profit up 10.4%, however there were signs of underlying weakness (Officeworks' growth slowed like-for-like and its Kmart, Target and chemicals business continue to be an albatross around its neck). 

Coles (-4% on the day of announcement) had a dizzy half, post spin out, with an underwhelming 5.8% decline in operating profit as comparable growth continues to languish and it faces rising operating expenses (wages, electricity, transition from single-use plastic bags). Meanwhile, Woolworths (-5% on the day of announcement) disappointed with softening supermarket sales and declining profit in liquor.

Fortescue (+5% on the day of announcement) decided to release a portion of the $1.8 billion dollars of franking credits it has been sitting on, tripling its dividend in the face of Labor’s proposed changes to franking credit refunds. 

Finally, Glencore surprised by announcing it will “cap” current coal production levels to limit its impact on climate change. This is a significant about face after a multi-billion dollar investment into two Queensland coal assets last year. Looking beyond the headline, the move looks to put further public and political pressure on other producers, which will likely result in a reduction of new supply, higher prices and benefit, you guessed it Glencore. Value over volume.

- Paul Grace