Investment Matters

Reporting season continues

Company profit reporting season ramped up this week, with five companies in your equity portfolio releasing results. 

Challenger

Challenger’s NPBT (normalised net profit before tax) result of $548 was in line with the company’s guidance.  Normalised net profit declined 2% to $396m (vs $406m pcp).  Statutory results were impacted by a -$88m investment experience.  It is also notable that Challenger delivered a stronger H2 than H1 (NPBT H1 $270m / H2 $315m).

Challenger’s biggest division: Life (annuities) had an 18% decline in sales to $4.6b.  Impacts associated with the Royal Commission (especially in relation to financial planning) were noted.  Additionally, Japanese sales were weak.  Your Investment Team will monitor Life sales numbers in coming periods, in particular with positive expectations for the revised arrangement with MS Primary in Japan.

COE (cash operating earnings) margin was down to 3.62% (down 31bps), driven by lower investment yields.  Overall, Life earnings (EBIT) were steady at $564m.

Earnings (EBIT) from Challenger’s Funds Management business declined 12% to $50.9m ($57.9m pcp).  Lower performance fees were a major reason for the decline.  Funds under management (FUM) increased 1% to $79 billion.

Challenger is forecasting a FY-20 full-year normalised net profit before tax of $500m to $550m.  Factors including continued advisor disruption, and lower interest rates (translating into lower annuity sales plus lower investment returns), have acted to moderate this forecast.  Challenger remains well capitalised.

Here, There & Everywhere

Here, There & Everywhere (HT&E) delivered a sound result under difficult trading conditions. 

Lower advertising demand translated into a revenue decline of 4%, and EBITDA (earnings before interest, tax, depreciation and amortisation) was up 1% (before the positive impact of new AASB 16 Leases accounting policy changes).

Lower finance costs (post the sale of the Adshel business), and a slightly lower tax rate benefited the profit line.  On a per-share basis the higher profit number, along with the lower number of shares on issue vs pcp (buyback), translated to a meaningful benefit to shareholders.

The company provided a cautious outlook for H2, noting the deterioration in the radio advertising market subsequent to the Federal election has continued into Q3 (the current quarter, noting for HT&E FY = CY).

HT&E owns good long term cash generating assets.  It has a strong balance sheet and provides a useful dividend income.

Pact

Pact delivered 10% revenue growth, assisted by an acquisition made in Oct-18.  Packaging volumes were lower than the pcp, but with some pass-though of higher input costs into prices.  Thus without the acquisition, revenue was in-line with the pcp.

At a divisional level, improved earnings from packaging and sustainability, and materials handling, were offset by lower earnings from contract manufacturing.  Higher raw material and energy costs impacted margins (but pleasingly resin costs reduced in H2).  Overall underlying EBITDA declined 3%.

Pact continued the implementation of its transformation program, including closing two facilities in H2.  Pact is also continuing its focus on sustainability, and is having contracting success in its crate pooling business (including a new contract with ALDI).  It has also recently been awarded a long-term contract in the US to provide a garment hanger reuse capability for a major retailer.

The company made a $423m writedown (pre-tax), principally associated with its Australian packaging business and goodwill.

The new CEO is enacting a strategy review, and has released a conservative outlook – for a modest improvement in EBITDA for FY-20.  The company also elected not to pay a dividend – instead, focussing on the balance sheet.  This was not well received by the market.

QBE Insurance

QBE delivered a strong result.  In relation to revenue-related measures, an average premium rate increase of 4.7% was implemented over the half, and net earned premium grew by 3%. 

The simplification of the business that QBE has undertaken, combined with focus on pricing, risk selection and claims management, has translated into bottom line returns for shareholders.  The Combined Operating Ratio (COR) of 95.2% (95.8% pcp) was a pleasing result. 

Note: COR is sum of the net claims ratio, commission ratio and expense ratio. A combined operating ratio below 100% indicates profitable underwriting results. A combined operating ratio over 100% indicates unprofitable underwriting results.

The return from QBE’s investment portfolio was high, at 6.8% including mark-to-market gains (2.1% pcp).

Overall, this meant cash profit was US$520m for H1 FY-19, as compared to US$385m for the pcp. 

QBE’s FY-19 targets remain unchanged: an investment return of 3.0% – 3.5% for FY-19, and COR to be between 94.5% and 96.5%.  The result for H1 provides confidence that this will be achievable, and it equates to a strong return for shareholders for the full year.   And finally, QBE remains well capitalised (APRA PCA 1.75x), affording an increase in the dividend for the half.

Healius

Healius (formally Primary Health Care) delivered a net profit increase of 6.5%, on revenue growth of 5.9% for FY-19 (as compared to FY-18).

Breaking the result down to a divisional level: 

  • Pathology grew revenue by 3.5%, with earnings (EBIT) declining 2.6%.  Higher labour costs and lower test volumes earlier in the year impacted margins.  (Healius indicated H2 had higher volumes and margin expansion.) 
  • Medical Centres grew revenue 13.0%, and earnings increased by 19.0%.  This was partially assisted by the acquisition of the Montserrat Day Hospitals (Nov-18), but the division also saw meaningful underlying growth.  Additionally, the operational metrics for this division saw strong improvement, for instance, GP recruitment and growth in gross billings per hour.
  • Imaging’s revenue increased by 7.9%, with earnings up 14.5%.  Growth in market share (existing and new sites), and continued strength in MRI assisted the result.

Through FY-19, the company has continued its significant investment in the business, and corporate restructuring (including management changes).  Investment included in the laboratory platforms, medical centre repositioning, and imaging IT.  We expect the ‘below-the-line’ costs to reduce, and greatly reduce from FY-21 onwards.

Additionally, there has been a number of positives to start FY-20, including a new imaging contract for the ADF, a significant ramp-up of earnings from the Montserrat day hospitals operation (including recently opened facilities), growth in IVF, and a return to more normalised pathology volumes.

Healius advised underlying NPAT is expected to be higher in FY-20 than for FY-19.

-          Fleur Graves