Investment Matters

What Matters this week

Technically Westpac’s H1 FY-19 result (period ending 31-Mar-19), which kicked off this week, looked okay - with an underlying cash profit of $4.05 billion, 5% lower than the pcp (H1 FY-18).  But cash profit, including major remediation (aka Royal Commission fallout, and the costs of getting out of their wealth business), fell 14%.  Putting aside the significant impact on shareholder value of the bank’s conduct identified at the Royal Commission, other red flags are indicating real ongoing pressures in the business.  Revenue trend is negative (this half -10% vs pcp), dividend payout ratio looks to be unsustainable, net interest margin 16bpts lower than pcp (and 4% lower than the prior period), and impairment charges seem ridiculously low.

It was a week of note in regard to macro pressures starting to wash through businesses other than the banks.  Adelaide Brighton, concrete and associated construction materials, cited residential market softness as a driver for its 10-15% lower NPAT expectations for CY/FY-19 (vs CY/FY-18).  Share price -10.3%.  And Graincorp cited the east coast drought (and grain trade conditions) for its disappointing H1 FY-19 result (and off already recently downgraded expectations).

On more positive notes, Orica’s (mostly explosives for sectors including mining and infrastructure) H1 FY-19 result was well received by the market (+5.6%), with operational improvements and higher margins benefiting revenue and earnings.  Some issues remain including the performance of the Burrap plant in WA, and it was a messy result e.g. in regard to write-downs, FX benefits and coming off a weak pcp.

Qantas released a positive Q3 trading update.  Revenue was up 2.3% vs the pcp, even with the negative impact of a later Easter.   But perhaps as a reminder to airline investors, Emirates advised this week a 7% decline in revenue and a 44% decline in profit for the year ending 31-Mar-19.  Oil prices, the stronger USD and lower occupancy levels were cited.   Oh, and I would be grateful if someone could inform me why Qantas is running a share buyback when it still has 8 ancient 747s in their fleet …

There were reactions from sighs to ‘you can’t be serious’ in regard to the ACCC’s blurt of the TPG / Vodafone merger decision on its website – a day earlier it was meant to be released (and when the market was still trading).  Kudos to the ACCC for ensuring an informed and equitable market (not!). 

They blocked the merger, citing (my words) they want TPG to roll out a fourth mobile network (which they wouldn’t do if merged with Vodafone).  But there is real risk the ACCC will lose a Federal Court appeal, as my understanding of competition law is they can’t block a merger because of what they want to happen in the future.  Instead, it has to be based on the market (mobile phone services) that currently exists.  And TPG has previously announced they aren’t doing their own mobile network because it doesn’t stack up economically, especially when Huawei equipment is banned.  Plus arguably a combined TPG/Vodafone will better compete with the Telstra behemoth anyway.

Facing pressures regarding new car sales, as well as Royal Commission fallout (in associated offerings such as lending), listed car dealer Automotive Holdings Group has accepted a scrip merger offer from fellow listed car dealer AP Eagers.  It is subject to ACCC approval …

And in what may mark the peak of the tech stock bubble, Uber has priced its IPO at US$45 per share, giving it a >US$75 billion market cap.  The price is at the low end of what the investment bankers wanted, but will still make Uber a larger company than say the global large equipment manufacturer Caterpillar (US$75 billion), and GM Motors (US$53 billion).  How is this possible for a company that doesn’t make a profit and has made no indication as to when it is likely to?

- Fleur Graves