Investment Matters

The big week of reporting season

It was a significant week, with 8 investments in your equity portfolio releasing results.  Summaries are provided below.

BHP

BHP delivered a result that was slightly below market expectations.  Net profit after tax for the period was $8.306 billion, reflecting higher prices (namely, for iron ore – which have moderated since year end), lower depreciation and amortisation charges, and favourable exchange rate movements.  This was offset by some cost and resource-related headwinds, including a decline in copper grades, a natural decline in petroleum fields, higher unit costs in coal, unplanned outages and weather impacts.

Overall, group production declined slightly (by 2%), with production of iron ore flat, copper slightly lower (4%) and petroleum marginally higher (1%). Realised prices were higher for a majority of commodities, however, were significantly lower for copper (-13%).  Production levels overall in FY-20 is expected to be slightly higher than FY-19, although the realised prices are expected to remain sensitive to global conditions.  Realised prices for iron ore are expected to moderate (as they already have) from the highs seen in FY-19.

Pleasingly, the company delivered a final dividend that was higher than expected, at 78 US cents per share.  It continues to maintain a strong balance sheet and a disciplined approach to deploying capital (with targeted capital expenditure remaining at <$8 billion in FY-20).

 BHP

360 Capital Group

In FY-19, 360 Capital disposed of its 67.3% stake in the Asia Pacific Data Centre (APDC) Group (a listed REIT which owned 3 data centres in Australia).  The proceeds from this sale were $155m, representing a 14.4% IRR (internal rate of return) on equity during the period.

The company saw a marked increase in finance revenue from $0.9m to $2.3m through its stake in the Total Return Fund (TOT) (a real estate credit fund).  Over FY-19 the Total Return Fund averaged $56.6 million in 1st mortgage loans, with repayments achieving an average IRR of 15.9%.  Investment revenue declined as a result of the disposal of assets in FY-19 (including APDC).

360 Capital also announced the launch of several new vehicles over the period.  This includes a Digital Infrastructure JV, which will look to invest in data centres and dark fibre networks (with which it has co-invested $25m) and a JV to form a private and public equity fund (with which it will co-invest $10m).

 360 Capital

Cardno

Cardno delivered quite varied performance across its divisions.  Group revenue increased 18.1%,  underlying profit declined 18.4%, and backlog grew 14.7% (backlog is an indicator of future revenue growth).  The latter was driven by two acquisitions as well as organic growth, especially in government services.  In regard to net profit, an increased amortisation expense (associated with acquisitions), operational performance in Australia, and investment in the International Development division weighted on the result (see below).

At a divisional level, the Americas division grew revenue 14.3% and margin (EBITDA) increased from 4.8% to 5.1%.  The Asia Pacific division (principally Australia) had a 4.1% decline in revenue and margin fell from 5.6% to 4.1% due to not winning any major projects in FY-19.  Whilst the International Development division grew revenue materially, margins declined also materially as investments were made.  The Construction Services division doubled revenue through both organic growth and two recent acquisitions.  Margins in the division remain strong at ~10%.

And in a significant development, Cardno announced it plans to demerge its consulting services related businesses (to remain as Cardno), from its testing / QA related businesses (subject to shareholder approval).  The latter will have the company name Intega, and also be listed on the ASX.  The merger will be implemented as a 1:1 share split.  Our preliminary view on this de-merger is positive.  We will review it in more depth once de-merger documentation (scheme booklet) is released by the company. 

CARDNOCML Group

CML Group released a strong result, including revenue growth of 2% (moderated by exit from legacy businesses), and profit growth of 60%.

This growth was also achieved whilst absorbing costs associated with establishing a new invoice discounting business.  Invoice discounting is a similar product to their core factoring offering but is typically offered to larger companies - providing the opportunity for larger revenues albeit at lower margins.  The addressable market is around 4 times the size of factoring.  This business is expected to comprise 15% of the total invoice finance volumes in FY-20.

The company’s equipment finance business is now maturing (commenced in Jul-17).  It achieved a small profit in FY-19.  It is expected to make a more meaningful profit contribution in FY-20 and thereafter.

Whilst making investments for the future, pleasingly CML also provided a significant step-up in the dividend.  It increased by 60% versus FY-18.  Overall, the result delivered strong earnings growth, the company is developing and investing for the future, and it is on track with our expectations (and actually ahead in, for instance, the equipment finance product offering).

CML GROUP

Origin Energy

Origin’s result was strong, with an underlying profit after tax of $1,028m, an increase of 42% on the prior year.  The result was driven by the performance of the company’s Integrated Gas Division, which delivered net cash of $943m.  This was up from $363m the prior year, driven largely by higher realised prices of natural gas and LNG.

The company met its guidance with respect to its Energy Markets (electricity and gas retailing) division, which delivered an underlying operating profit (EBITDA) of $1,390m.  This represented a decrease of 10% on the prior year and was largely attributable to regulatory changes with respect to electricity pricing, which led to price relief measures and further competition/discounting.  This was somewhat offset by improved profitability in gas retailing.

After reinstating its dividend earlier this year, Origin will now pay 30-50% of free cash flow to shareholders (excluding major growth projects and less interest paid).  This has translated to a 15cps dividend, an increase of 50% from the dividend announced at the half-year. The company is forecasting production of 680-700PJ from APLNG in FY-20 (compared to 679PJ in FY-19).

origin energ
Southern Cross Media

Southern Cross delivered a sound result.  Underlying Net Profit after Tax was $76.2 m, an increase of 3.1% over the prior year.  The company saw an improvement in its operating margins, largely due to the outsourcing of its transmission services.

Performance was buoyed by the resilience of its audio segment, which delivered revenue growth of 2.4% (in spite of challenging market conditions), with strong growth in metropolitan radio and an improved operating margin due to a reduction of employee costs.

Revenue from the Television segment was down slightly (-3.2%), largely due to soft advertising spending in Q4 (which we have seen across the advertising industry more generally) although a reduction in costs lead to a modest improvement in operating profit from the segment (after adjusting for significant items and restructuring costs).

While conditions in the advertising market remained challenging in July and August the company expects a stabilisation of activity in September and a return to growth in October.

SOUTHERN CROSS
Worley

Worley's result was complicated because FY-19 contained 2 months contribution from the major acquisition, Jacobs ECR (completed in Apr-19).  Therefore, it was important to consider 1. how the Jacobs ECR business has contributed, and how the integration is tracking, and 2. how the original WorleyParsons business is performing.  Whilst this is not readily discernible from the figures in the table below, looking in more depth at the result indicated a positive outcome on both considerations.

Firstly, the ex-Jacobs ECR operations have delivered cost, margin and revenue synergies.  Group net profit increased materially through the addition of ECR and expected synergy benefits have been revised higher.  Secondly, underlying revenue grew 17% (plus the ECR contribution).  Profit margins also trended up in the WorleyParsons operations.  Thus WorleyParsons has itself been growing earnings.

Overall, performance metrics have been improving, including measures such as utilisation, EBITA margin and gearing (at 20.9% it was better than anticipated).

Additionally, the outlook is trending positively, with the company announcing a number of new contract wins in recent times, and the proforma backlog (as if Jacob's ECR was owned for the full year) increased 10% to $18b.  This backlog is also more diversified with an increase in opex and chemicals exposure.  However, the company tempered the outlook, noting global macroeconomic risks (such as BREXIT and trade wars).

Worley

Emeco

Emeco released a strong result, as expected.  Revenue increased 22%, which flowed through to a material increase in profit (all figures as compared to FY-18).  Operating EBIT margin increased from 21.8% to 27.0%, which is expected to moderate around this level.

Strong operating cash flow was utilised to invest in growth capex (new assets).  With no significant growth capex expected for FY-20 (and sustaining capex to be generally in line with depreciation), cash is expected to be available for future dividend payments (once a debt refinance is completed).

Gearing continues to be aggressively unwound, with leverage at 2.0x net debt/ operating EBITDA (2.6x in FY-18) - and this was in the same year as meaningful growth capex spending was completed.  For FY-20, de-gearing is expected to continue towards the ~1.0x target (along with dividends re-commencing), and a refinance at a lower interest rate (with materially cheaper finance costs) is also expected.

Operationally, Emeco is increasing its commodity diversification.  Improving demand from WA (iron ore and gold) is resulting in reallocation of assets away from the east coast.  Thermal coal contracts now comprise 23% of revenue.  The company is continuing its focus on asset management (including maintenance / workshop facilities), use of technology, optimising the quality and performance of its assets, and return on capital for shareholders.

As FY-20 starts, Emeco is seeing continued strong demand from metallurgical coal customers, as well as strengthening conditions in WA.  Increased earnings, strong operating cash flow and reduced debt are expected for FY-20.

emeco