Investment Matters

What Matters this week

The week started with market participants collectively hitting the sell button on Tuesday (the All Ordinaries Index was down 2.5%!).  This came after a retaliatory head-fake from China, who briefly devalued its currency to levels not seen since 2008.  This prompted the US Treasury Department to label the country as a “currency manipulator”.  So much for progress.

The market slowly clawed back some of this loss over the remaining days (ending the week down by less than 1%).  

Meanwhile reporting season has begun in earnest.

Some of this week’s results:

  • Transurban (-2.8%) took advantage of the ultra-low interest rates implied in its share price, raising $650m to acquire the remaining stake in Sydney’s M5 West toll road.  Not much to see in terms of its result (although less of the distribution was covered by operating cash flow), with its distribution increasing as expected and the company guiding towards a 5% increase in FY20.

  • AMP (-5.1%) still has its challenges.  Outflows from its Wealth advisory segment continued (circa $3bn for the half, much the same as the previous) while costs were up, leading to a 35% drop in profit vs the previous half.  AMP Capital’s result gave a good headline (underlying operating profit after tax +28.1%), but was driven mainly by investment performance rather than inflows.  Meanwhile AMP Bank's result was underwhelming (operating profit after income tax was down by 9%), showing some growth in mortgages and stable margins, along with some sign of deterioration in its loan book.  On the upside the sale of Life looks like it will get away at a higher value than expected, it looks like they have managed to raise some money ($650m) to fund its near-term ambitions and it seems like they have some sort of plan for wealth moving forward (still looks like a tough ask).
  • Property Group Mirvac’s (+3.0%) result was in line with expectations although residential settlements were higher than expected.
  • Shopping Centres Australasia (+0.4%) delivered a respectable result given the integration of the centres recently acquired from Vicinity and a tough retail environment.  Distribution per unit was up 5.8% although its expected to be up only 2.7% in FY19.
  • The Commonwealth Bank (-2.8%) is an “interesting” proposition at its current price.  Cash profit was down 4.7%, some 2% lower than expectations.  Lower income, rising costs (remediation, compliance, reduction in fees) and headwinds from the prospect of lower rates.  Putting any views on house prices and impairments aside, the company will need to cut costs 2.5x faster than it loses income in order to leave its profit unchanged.  And there was no clear indication of when the cash from recent asset sales will end up in shareholder’s pockets. Even after dropping this week its price is still ~5% higher than brokers’ target price (which we all know tend to be on the generous side).

In other news..

Lendlease (-2.1%) provided an example of why directors' and officers' liability insurance premiums are skyrocketing for listed companies countrywide.  It was hit with another class action (grand total now of two) lawsuit this week around its disclosure of the performance of its engineering and services business.

Despite Australia experiencing a warmer winter than on average Kathmandu (+14.3%) surprised in a doom and gloom discretionary retail environment by guiding towards higher sales in FY19 of 9.6%.  It expects same store sales in Australia up 2.7% although sales in New Zealand continue to be a drag (-3.9%).

Speaking of, the Reserve Bank of New Zealand instituted an unexpected 50 basis point cut, because ... why not.

Lastly, Rural Funds Management was targeted by short seller Bonitas Research, who alleged the property trust has been funding distributions from the money it has raised from investors (vs income from its agricultural assets) and siphoning funds off to management.  Their conclusion - the company is “worthless”.  Its share-price dived by 52% before making some-what of a recovery later in the week (still down -20%).


- Paul Grace