Investment Matters

What Matters: Packaging behemoth. CBA result = not good, but others are okay.

Corporate takeover action of the week clearly went to international packaging company Amcor.  It announced the proposed takeover of US-listed packaging company Bemis (Amcor has reportedly been trying to get its hands on Bemis for over a year, so no one was particularly surprised when they went into trading halt).  The scrip offer will see a combined company listed on both the ASX and NYSE, with an estimated market cap of US$17 billion.  Commentary raised concerns about the price Amcor has paid (too much).

Disclosures of abhorrent behaviour by the banks continued ad nauseam this week - focussing on superannuation and the NAB.  Pick any newspaper for an update.  The bigger picture question, which really hasn’t been considered let alone answered, is what it is going to mean for the operating models of the banks, and AMP …  And p.s. ASIC: you have to change way more than your logo to turn around the negative public perception that you are (quite rightly it seems) acquiring as a result of the Royal Commission.

Ouch, ouch and ouch was my reaction to CBA’s full-year financial results (ending 30-Jun-18).  The result, putting aside all the one-offs (which I will get to, below), shows the heydays of the banks are over.  Revenue +2.9% and operating expenses +3.1%, i.e. growth was pitiful and margin squeeze is clearly on.  Cash EPS (and Earnings on a Per Share basis is what matters to shareholders) was -6.2%.  And a half-on-half decline in both revenue and profit (i.e. the negative trend appears to be accelerating).  CBA may be able to dress up the media release, but it can’t hide the underlying trend of decline in the business.  But with the share price up 2.6% on the day of the release, maybe some investors only care about the imminent dividend (up a token 2 cents on FY-17, to $4.31).

And now, the one-offs.  They totalled $1.05 billion (or $788m on a post-tax basis); roughly 10% of the total cash net profit.  More “one-offs” are likely in FY-19, and maybe beyond, because of past regulatory, systemic and cultural issues / violations being disclosed at the Financial Services Royal Commission and elsewhere.  To put these costs aside and describe them as one-off’s is a bit cute – the bank profited from this behaviour in the past (and didn’t classify those benefits as one-offs) and the costs and penalties are destroying shareholder value.  So the statutory EPS decline of 7.4% vs FY-17 (including discontinued operations) should garner a lot more attention than it is.

Online recruiting advertiser Seek flopped at the start of the week.  Valuation writedowns on Brazilian and Mexican operations, and a disappointing outlook for FY-19 (versus consensus expectations) = question as to whether Seek’s international expansion strategy (and associated investment spending) will provide an adequate return for shareholders.  Share price –8.8%.

Seek was later eclipsed by Eclipx Group (owner of the online auction house Gray’sOnline, as well as vehicle leasing, financing and medium-term rental), with a 10.6% downgrade to expected FY-18 net profit (NPATA, based on midpoints).  Share price was -40.8%, with a slight recovery the day after the announcement.  Gray’sOnline (only acquired in Aug-17) was a driver of the downgrade, because of reduced auction disposals (e.g. heavy construction equipment being retained on jobs longer [bodes well for Emeco’s demand outlook]).  Their Right2Drive business (acquired in May-16, provides rental cars to not-at-fault drivers post an accident) has also downgraded earning expectations as insurers push back. 

AMP’s H1 FY-18 result was not surprising, but still bad.  Not surprising because it had pre-warned the market through previously-released guidance.  Bad on many metrics, e.g. profit, capital position deterioration, fund inflows (well actually outflows in Q2 when the Royal Commission started having an impact).  However, it feels like the full extent of the impacts on the business is yet to be felt.  Heard the expression ‘a falling knife’?

But the results are not all bad, far from it.  This week we saw strong results from Crown Resorts and Tabcorp (both gambling), Magellan (fund manager), and Mirvac (office, industrial, retail property owner, and residential property developer).  AGL (energy generation and retailing) had an exceptional result, but it appears to have peaked.  And okay results from Orora (packaging) and Transurban (toll roads).