Investment Matters

What Matters this week

It was the final week of reporting season.  But before we get to that:  Even the politicians were seen to be up in arms by Westpac’s 0.14% increase to its standard variable.  It was driven by wholesale funding costs (not a cash rate increase by the RBA).  Pressure on net interest margin (simplistically the difference between the rate banks borrow at, and the rate they lend to us) will reduce.  Hence, profit goes up.  Hence, so does the share price: +2.7%.  After all, arrears never go up when you put rates up…  And especially not when households are already stressed…

Vodafone (Hutchison) and TPG are proposing to merge, creating a third pillar in the telecoms space (along with Telstra and Optus).  NBN is at the core of this merger (as well one being one of the strains on Telstra) as margins are under such significant pressure, creating a real shakeout.  Share prices went berserk: TPG +18.1%, Hutchison +44.0%.

To results of interest released this week:

Private hospital operator Ramsey Healthcare released a disappointing FY-18 result, including poor trading conditions in its UK and French operations and asset valuation write-downs, restructuring costs and an onerous lease provision – all signs of operational stress.  Share price -6.3%.

In contrast to Qantas’ positive result last week (but with a dampened outlook driven by fuel prices), Virgin Australia’s losses blew out further in FY-18, driven by restructuring and write-downs.  Underlying profit of $109.6m (vs an underlying loss in FY-17), and a positive outlook for FY-19, still disappointed the market, by -4.0%.

Childcare operators have been under pressure this reporting season.  It comes as oversupply emerges (the build-and-they-will-come approach is proving flawed in many locations) to the point where there is a chronic oversupply of spaces.  Today the AFR reported operators are even offering iPads to enrol [the perfect present for a 1-year old].)  Major player G8 Education released a disappointing H1 FY-18 result (their FY = CY).  Revenue increased 7.6% - even though occupancy was lower (70.1% vs. pcp 72.6%).  This was driven by rates increase (which I am sure the Government will be impressed with.  Yes there a bit of sarcasm in today’s What Matters.), and new centres.  Higher wage costs were also incurred, and it resulted in a 23.9% fall in underlying net profit, or a -22.1% statutory decline.  The outlook did not instil any excitement either.  Share price -16.5%.

There were some strong results in the last week of reporting season (which is when the bad news stories are usually released).  Profits from construction products company Boral surged, increasing by 49%, and beating expectations.  US operations are doing very well.  Share price +10.1%.

Similarly, for vitamin company Blackmores’ strong FY-18 result, driven by strong sales into Asia, buoyed profit 18.6% to $70.0m.  And also the share price +11.5%.

Bega Cheese had a 55% increase in underlying profit, to $44.0m.  It acquired assets from international food player Mondelez in FY-18, which contributed to the revenue increase.  The market still viewed the result favourably; share price +2.7%.

Baby formula company, with a troubled past (to say the least), Bellamy’s, had a 37% increase in revenue in FY-18.  This translated to a profit increase of 65% (and a share price increase of 7.4%).

And also Adairs: their profit bounced back in FY-18, after their product offering failed to entice sales in FY-17.  Profit +45.4% vs FY-17, and share price +3.4%.

The market returns to some degree of normalcy next week.  Until then…