Investment Matters

What Matters this week

Australia's Italian-esk political developments have overshadowed market news this week.  But a lot did happen.  Before we discuss results from reporting season, there were some other interesting developments:

Afterpay sort of acquired 90% of a UK business, ClearPay, that provides similar buy-now-when-you-can’t-really-afford-it loans that Afterpay does.  It plans to roll out the Afterpay model in the UK.  It paid 750,000 of its own shares (worth about $13.9m using the closing share price before the announcement), and another 250,000 shares in 6 months, to acquire no earnings (or losses) from ClearPay’s operations, no intellectual property, is going to roll in its own management straight away, and isn’t going to use the ClearPay brand.  And even after it has rolled in its own people / processes / systems / IP, it doesn’t forecast any earnings, or even revenue, in the short term.  What does it get? – corporate ‘knowledge’ (uuugh), and ClearPay’s contracts with retailers.

Coincidently, it conducted a $117m capital raising (with a SPP to follow) to fund growth in the loan book, pay for people and infrastructure in the UK and USA, and to fund expected FY-19 losses from the UK and US businesses.  And the company will definitely not make a profit in FY-19 – and probably not in FY-20 either.  In the medium (and long) term, it needs to be mightily successful, not just in the US now – in the UK too.

The share price was +17% post the announcement and raising.  I just don’t understand…

AGL’s Amercan CEO, Andrew Vesey, has pulled up stumps, taken his expansive pay and options, and headed home.  With no notice.  Leading into this, his prior 4 years were marked by significant price rises / margin increases (some commentary is AGL has led the price gouging), and as a result, recent push back from the Government and more broadly.  Now AGL and the energy retailing / generation sector more broadly will have to spend the next 5 years or so undoing the damage.

Rumours abounded about a merger between TPG and Vodafone, and TPG confirmed discussions have occurred – not really surprising given scale benefits that would arise, 5G is coming and it makes sense to knock out one of the participants, and telecoms companies are under a lot of margin pressure in the NBN world.

AMP has put in a clean skin CEO, Francesco De Ferrari, to try to turn its fortunes around.  It will be interesting to see how (or if) he addresses the structural flaws in AMP’s operating model.  This one still feels like a falling knife…

Now to the interesting snippets from the company profit reporting season:

Commodity prices have buoyed earnings from the likes of Santos (oil and gas), Alumina (bauxite mining and alumina [precursor to aluminium] refining), and to a lesser extent Newcrest (gold and copper).  And the service providers to such companies are benefiting too – WorleyParsons’ FY-18 revenue up 8.5%, underlying profit increased 39.1%, and backlog +25.5% over FY-17.

The perennial issue of fuel prices gave a slight reality check to expectations of Qantas’ shareholders.  Underlying profit increased 14.5% vs FY-17, but further increases in fuel costs are likely to negate any operational and efficiency gains achieved in FY-19.  

Staying on the travel theme, Flight Centre released a strong result, reaching the top end of guidance (profit +14.5%).  But high expectations were dampened, and press regarding fair compensation of employees, and corporate culture more broadly, overshadowed the result.  It feels like there is much more to go on the latter…  Also, once-market-darling Webjet is heading for darling status again with 30% increase in profit, and success in their online travel agent business and the B2B business WebBeds.

And online is the place to be.  Carsales (online car marketplace) had a stellar result (profit +10.1%).  Their share price increased 10.9%, but then was checked back the following day once some more consideration ensued (-7.4%).

Super Retail Group (Supercheap Auto, Rebel, BCF and other retail brands) beat expectations with its FY-18 result.  Share price +8.2%.  Ansell also released good earnings, but disappointed on its outlook (share price -7.2%).

Woolworths net profit was up 12.5%, supported by growth in the Australian supermarkets division.  BigW continues to be a basket case (loss decreased 26.9% to be $110m), but investors weren’t surprised.  A special dividend was positively received, but the company indicated that it was a slow start to FY-19 for their key Australian supermarkets division (blaming plastic bags and Coles’ little products [or whatever the gimmick is called]).