Investment Matters

What Matters this week

Xero (+9.1%) continued to show explosive growth, increasing user numbers to 1.8m from 1.4m a year earlier.  The company benefited from strong growth in the UK and North America as it continues its international expansion.  On the back of a rally in its share price this week, the company now sits at a lofty forward P/E of 234.  There is no doubt it produces a sticky product with high utility, the question moving forward is will it be able to fill the size 16 shoes that market expectations have laid in front of it.

The Commonwealth Bank (-2.8%) posted a 9% drop in cash profit on Tuesday.  This was excluding the additional $714m it provisioned for remediation costs, which blindsided the market.  The provision was largely for Aligned Advice (advisers who are not directly employed by CBA) remediation – with $180m in costs for the implementation of Royal Commission recommendations (one wonders where they have drawn the line as to what is considered “one off”…). This brings its total post-Royal Commission toll to over $2 billion.  Net interest income for the bank was relatively flat while non interest income contracted due to derivative valuation adjustments, higher weather-related insurance claims and initiatives aimed at achieving "better customer outcomes" (i.e. avoiding future remediation provisions).

Meanwhile the banks remain in a state of lending limbo, with the ongoing litigation of Westpac by ASIC yet to draw to a conclusion.  They will be waiting intently for the final judgement by Justice Nye Perram, which is set to shape expectations around responsible lending obligations.

Shareholders of Reliance Worldwide (-21.0%) were left with little to be positive about this week, after it downgraded its earnings forecast for FY-19 by 7%.  Its trading update reflected poor results across all geographies.  Amongst the company’s woes are the potential impact of tariffs on China, a lack of a “modest freeze event” in the Americas, a sharp fall in sales of discontinued product lines, the adoption of an inventory light strategy by its channel partners and the slump in new home construction in Australia.

In the latest push to differentiate themselves (in what is increasingly becoming a crowded infant formula market), producers Bubs (-8.8%) announced the launch of Australia’s first grass-fed cow's milk infant formula.  Parents in the Middle Kingdom and Australia alike will no doubt be delighted to continue to pay a premium for (essentially) nutritionally equivalent products ….

Drug manufacturer Mayne Pharma (-14.2%) gave the market a harsh reminder of what the term “generic” means.  The company gave a disappointing market update, with a 15% drop in sales from its flagship Generics Products division.  The company has been under increasing pressure as the pharmacy and insurance industries have consolidated and regulators have fast-tracked the generic drug approval process.

It wasn’t the cold weather that had shareholders of funeral home operator Invocare (+1.5%) rubbing their hands together this week.  The group released a “positive” (or rather, positively morbid) trading update in light of the number of deaths in Australia beginning to return to the long-term trend.  With one of the worst starts to a flu season on record, the outlook for Invocare’s full year result is looking equally “positive”.

Fortescue Metals Group (+11.4%) managed to squeeze in one more dividend payment this week.  The company announced a 0.60c/share dividend this week, as it looks to extract maximum value from its franking credits, in the face of a potential change under a labour government.  This bringing its total dividend for this financial year to 90 cents per share, an approximately 10% yield at its current share price.

Sigma Healthcare’s (-1.9%) shareholders did not hold back at its annual shareholder meeting, with 18% voting against the company’s remuneration report.  Its share price has tumbled (by circa 50%) after the loss of its key contract with industry Goliath Chemist Warehouse, with management dismissing an offer from competitor API earlier this year at a meaty 70% premium to the then share price.  Management better hope they deliver on the $100m of cost efficiencies they have guided towards within the next two years.

Lastly, Thursday provided another "facepalm" moment for shareholders of BWX (-11.5%).  The company announced a ~30% profit downgrade, after a ~25% downgrade in February.  Un-surprisingly its CEO has been shown the door, in favor of Blackmores ex CEO David Fenlon (who recently left Blackmores after similarly disappointing results).  The company’s share price of $1.70 is now an ocean away from the $6.60 per share a Bain capital backed MBO offered for it back in March of last year.

Note: Price changes represent performance for the week to market close on Thursday afternoon.


- Paul Grace