Investment Matters

What Matters this week

Another week, another market hiccup. The bearish trifecta of trade, Trump and tariffs was joined by a fourth T: twos tens.  Inversion of the yield on US-government bonds, with bonds with a maturity of 2 years yielding higher than those with a maturity of 10 years, triggered a sell off on Thursday.  While this fourth “T” has foreshadowed past recessions, as the truism goes: correlation does not imply causation.  However, the market certainly reflected that it is cause for caution.

Added to this, it was a week of rather underwhelming results.  The majority of the standout performers managed to surpass low expectations while the stragglers failed to justify their inflated price tags.

In spite of the retail doom and gloom JB-Hifi (+10.2%) delivered a solid result, with group sales increasing by 3.5% in FY-19 and decent comparable sales (+2.8%).  Furthermore, margins were preserved as expenses were up only marginally, leading to a 7.1% increase in net profit after tax.  However, the company was less excited (albeit clearly conservative) about its outlook for next year. 

Likewise, Super Retail Group (+5.5%) was resilient, with total sales growth up 3.4% and comparable sales up 2.3%, with operating margins broadly stable and net profit after tax up 5%.  Trading so far in FY-20 has been positive (with comparable sales up 2-5%), giving cause for some optimism. 

This was in contrast to signs of retail property weakness from property groups GPT (-2.4%) and Vicinity (-3.6%).  The latter having to hold onto $1 billion of retail assets that it intended to spin-off due to investors’ “limited appetite”. 

The now prophylactic free Ansell (+4.7%) delivered a good result despite a slowing growth environment, with its Healthcare business unit delivering 4.8% growth (constant currency terms) while its Industrial unit was relatively flat with 1.5% growth (in constant currency terms).  However, further down the income statement things got a little messy, with ongoing transformation costs making its underlying net profit opaque. 

Railway operator Aurizon Holdings (+0.9%) result was about as exciting as you would expect.  This week’s chatter was around the return of $300m to shareholders in FY-20 and its plan to legally split its capital structure, which will allow it to fund itself at a lower interest rate.  

Magellan (-17.2%) is acutely aware of the fact that its share price has tripled in the current financial year, on the back of the impressive performance of its funds.  The company looked to raise $275m after announcing a 35% increase in adjusted net profit for FY-19.  It also snuck in the launch of a high conviction (and high fee) trust. 

CSL (+3.0%) did as CSL does, continuing to defy economic gravity by chugging along at a healthy pace.  Net profit after tax was up a healthy 17% for FY-19 (at constant currency), albeit aided by a lower tax rate.  What stood out in a world of quarterly capitalism was that the 103-year-old company has upped its research and development spend by 21% for the year.  You pay a lot for this pragmatism though (forward P/E of 33). 

Likewise, ASX (-1.9%) performed as any pseudo monopoly should, with net profit after tax up 13.5% on a like for like basis (albeit slightly below market expectations), although margins narrowed slightly as staff costs increased. 

On a soggy day, (Thursday) waste manager Cleanaway (-12.0%) sank to the bottom of the trash pile, after it hinted it will disappoint in FY-20 (in spite of being priced for perfection).  The culprit, China who is no longer accepting our scrap for recycling (China: we have enough of our own thanks). 

Ditto for vitamin manufacturer Blackmores (-16.4%).  Their result in a word: terrible.  Despite a 16% increase in sales and marketing expenses (targeting Chinese consumers), sales in China were down 15% (new e-commerce laws putting the handcuffs on traders), flat in Australia and New Zealand and close to flat overall.  On top of this, operating expenses were up 12%.  The net result was a 21% decline in net profit after tax, a full 45% lower than the previous half.  The company cut its final dividend by 55%, which coincidentally is more or less the return it has delivered shareholders over the last year.

Sold tonnage was down for Whitehaven Coal (-0.9%) and costs per tonne were higher than expected (with washing producing “cleaner” coal, which overall has been costlier to extract) as it looks to ramp up and replace existing production.  Adjusted net profit after tax (+8%) and its dividend was both up though, as pricing remains accommodative.

Lastly, after much debate, it looks like the Household Expenditure Measure (HEM) used to assess borrowers’ expenses may here to stay.  ASIC’s case against Westpac concluded with costs awarded against the regulator (vs the previous settlement which would have imposed a $35m fine against Westpac).  In Justice Nye Perram’s opinion, use of the bare-bones benchmark is logical because borrowers can always cut back their expenses i.e. substitute 250g of Wagyu beef for a can of baked beans if times get tough.