Investment Matters

What Matters this week

Earnings season wrapped up this week to little fanfare.

Rio Tinto (+1.1%) continued the franking credit downpour we have seen from commodity producers, announcing a $2.43 per share (2.5% of its share price on the day) special dividend on the back of recent asset sales and a tightened balance sheet. Its "carbon conscious" virtue signalling (à la Glencore last week) on the other hand was a little perplexing (I'm sure it has absolutely nothing to do with trying to appeal to a broader funding base with ESG investment mandates ...).

Yancoal (+2.0%) went the way of Rio, announcing a $0.13 per share (3.6% of its share price on the day) special dividend after a 121% increase in operating profit (largely due to an increase in sales volumes (68%) and average realised price (16%)).

Bingo's (+15.2%) shareholders breathed a sigh of relief as its acquisition of Dial-a-Dump Industries was approved in conjunction with a buyback (management clearly feels the sell-off was over-done). This caused its share price to claw back some of the loss from last week but doesn’t change the fact that 25% of the business is leveraged towards residential construction.

Another week of bad news for the Banks. Labor announced plans for a $640m levy ($160m total from any financial institution in the ASX top 100 for a period of four years). Furthermore, the RBNZ signalled it will hold firm on a proposed increase in capital requirements for banks operating in New Zealand. Will this change culture and misaligned incentives in the industry?  Probably not.  Will this make the banks safer?  Perhaps.  Will it result in higher rates on mortgages and small businesses loans?  If the past is any indication …

Blackmore’s CEO called it quits, on the back of the company’s disastrous results last week (share price -24%) while the last of the Daigou three musketeers, Bellamy’s (+0.3% on the day of announcement) posted a significant drop in revenue (-26%) as it continues to wait for SAMR approval to start selling its Chinese label products into China, although there were green shoots with respect to an increase in gross profit margins.

Ingham’s Enterprises (-8.2%) was whacked with a higher tax bill, leading to a decline in net profit of 5.3%.  Underlying profit was up 3.6% however (in spite of higher feed stock, electricity and insurance costs) due to respectable volume growth and cost-out initiatives.

Seek (+8.3%) delivered operating profit growth of 6% after it grew revenue by 21%.  Growth was largely underpinned by its Chinese arm, Zhaopin (+39%) and improving margins in Australia & New Zealand.

Property REIT … I mean retailer (an easy mistake to make when a company is holding >$3 billion worth of property), Harvey Norman (+1.1%) delivered an “ok” result.  Management focused on revenue growth from their company owned international stores, where sales grew by 15%.  Sales for the Australian franchise, however, were not so hot (although ahead of market expectations) with a 0.6% decrease in comparable sales.  With overall underlying profit before tax up a meager 0.3% (after deducting property valuation gains amongst other things), the company will have to continue to deliver on its international aspirations for a re-rate.

Lendlease (-6.4%) results largely reflected timing differences in project completions and the disastrous performance of its Engineering and Services business, which it has now determined to be non-core (i.e. no longer required – heading for a trade sale, wind down or demerger).

Afterpay (-11.5%) continues to grow like a weed in the US, with total income up 91% across the group.  But that’s the least you would expect as a shareholder of a $4.5 billion company with $11m in underlying operating earnings.  A conservative back of the envelope calculation: analyst valuations are pricing in a lift in total sales – the value of the goods purchased using the service - from ~$4.4 billion this financial year to ~$13 billion by 2021 …)  

Our overall take on the market’s first-half results: while we saw some significant share-price movements based on stock specific catalysts, underlying earnings growth was muted, with price moves (excluding a resources sector buoyed by higher commodity prices) reflecting a rebasing of expectations rather than broader out/under performance.

 - Paul Grace