Investment Matters

Company Profit Reporting Results

Challenger

Challenger’s first half results show a company that is on track to meet its full year guidance (net profit growth between 8% to 12%).  We viewed it as a solid result showing good continued growth.

Assets under management increased 18%, return on capital dipped to 16.8% (impacted by the MS&AD capital raising in Aug-17, expected to revert to 18%+ in coming periods), and cost to income (a measure of efficiency) remains well below industry average.  Normalised net profit before tax increased 8%, equating to a 6% post tax increase because of a higher tax rate.

The company’s main life division delivered a 21% increase in sales.  Annuity sales increased 4%, with other life sales (including Guaranteed Index Return mandates and the new Challenger Index Plus Fund) driving the overall increase.  Earnings increased 6% to $283m.

The smaller funds management division has a 22% increase in net flows, driven by the boutique Fidante funds collective.  Earnings increased 31% to $27.1m.

Challenger’s capital position further strengthened, assisted by the equity placement in the half.

Challenger Half Year

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Suncorp

Suncorp’s first-half result was disappointing.  But the company did point to a stronger second half, and set bullish targets for FY-19 and FY-20 – including cash ROE of 10%.  This implies significant upside in coming years.

For H1, the company’s largest division, Insurance (Australia) had a 28.5% fall in earnings, to $264m.  Net earned premium (a revenue-like measure) rose slightly.  However, claims costs increased 14.7%, including the impact of the natural hazard cost as mentioned in IM last week. (See story written from last week) - but also partly due to accounting impacts (e.g. risk-free rate increase).  Operating expenses also increased 7.1%.  Life Insurance had a 172.7% increase in earnings, as life insurance (including TPD and income protection) began to stabilise (at corporate and industry level).

The company’s banking division had a 5.3% fall in earnings to $197m.  Net interest income increased 7.2%, but non-interest income (e.g. fees) fell 12.8% and operating expenses increased 13.0%.  Total lending grew 8.7%.

And finally, Suncorp’s New Zealand operations (the smallest division) grew earnings 81.1%, to $67m.  Increased net earned premium, lower claims costs and flat operating expenses resulted in the earnings increase.

The roll up of these three divisions to group level equated to a 14.8% fall in earnings for the half year.

In terms of the cost pressures seen in the Australia operations, the company is undertaking a Business Improvement Program, which is aimed to make meaningful savings to the cost base in the future (but with $50m of costs now).

Suncorp

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South32

South32’s strong cash generation has turned into a reward for shareholder’s – via a US3.0cps special dividend, in addition to the ordinary US4.3cps dividend.  Additional funds to expand the buyback were also announced.

The result itself was in line with expectations.  Strong cash generation from the company’s mining operations resulted in a net cash position of US$1.4billion. 

Underlying earnings before interest and tax (EBIT) benefited from increased prices for the commodities sold (+US$702m), but was impacted by lower sales volumes (-US$373m) and a number of smaller factors such as inflation and foreign exchange costs.  Overall underlying EBIT increased from US$691m for H1FY-17, to US$724m for H1FY-18.

Cost pressures are increasing; unit costs were revised up for most operations.  The increases were generally moderate, but more significant for Cannington (silver/lead/zinc mine) and Worsley Alumina (electricity driven).

FY-18 production guidance is unchanged for most of South32’s operations, with a decline at Cannington due to more difficult and lower grade ore.

South 32

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HT&E

HT&E’s numbers are messy, because of a number of one-off accounting charges, windfalls and expenses in the last two years (e.g. associated with the full acquisition in FY-17 of Adshel, a writedown in FY-18).

Thus it is useful to specifically consider the performance of the company’s two division – the ARN radio network, and the outdoor advertising business Adshel.

ARN had revenue growth in H2, mostly offsetting a slow H1.  With costs up <1%, earnings were down 2.7% for the year.  The company has been focusing on key talent and has done well in the most recent radio listener number survey.

Adshel grew revenue 7.5%, and earnings 11.3%.  Digital revenues drove the margin increase.  Operationally, loss of the Yarra Trams contract impacted Q4, but the new Metro Melbourne Trains contract will see Adshel grow will more than 750 screens in Australia (plus another 300 in NZ).

The company also provided a trading update for FY-18 to date:  For ARN momentum in H2 has continued into the start of FY-18, with forward advertising bookings indicating similar revenue growth in Q1FY-18.

Adshel bookings for Q1 are in line with 2017, after adjusting for the Yarra Trains contract.  Costs are 9-10% lower, due to savings on fixed and variable rent contracts.

HTE

 

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Origin Energy

Origin Energy released a good result for H1.  (As with other summaries, it is based on continuing operations.  This is notable for Origin as it excludes the sale of the Lattice assets, which was made effective on 1-Jul-17.)

Earnings before interest, tax, depreciation and amortisation (EBITDA) increased 51% to $1.49billion.  Underlying net profit increased from $255m to $428m, driven by earnings growth in Energy Markets (energy generation) and the LNG plant.  Origin took non-cash impairments on the Ironbank gas field (reserves haven’t lived up to expectations) and on the sale of Lattice, which impacted statutory results.

Earnings (EBITDA) from the Energy Markets division increased 21%.  It benefited from higher realised electricity generation prices, and to a lesser extent from higher gas volumes and prices.  On a negative note, as per AGL, Origin noted increased competition and churn in its retail operations, and customer accounts decreased by 47,000.

Integrated Gas EBITDA increase 120%, as the APLNG delivered good results, and has now shipped more than 200 LNG cargos.  Both increased volume and price benefited the result.

Operating cash flow increased 43% to $552m.  The balance sheet further improved, with net debt decreasing $953m to $8.36billion, and gearing around the same as the pcp (43.0% vs 41.8% pcp).  It will further strengthen when the proceeds of the Lattice sale are received in H2 (~$1b).

In relation to the outlook, Origin increased the earnings forecast of the Energy Markets division 3.7% (at midpoint), to a yoy growth of 21.6% (at FY-18 midpoint forecast).  The APLNG forecast is also good, with the FY-18 production volume forecast unchanged, and revenue forecast to increase further.

Origin

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Aveo

Aveo’s H1 results were impacted by negative press.  The company noted a more positive end to the half, as measures such as further simplified contracts and money-back guarantees, along with a marketing campaign, acted to turn the sales momentum around.

Looking at a divisional level – Aveo’s established retirement business (excludes the development of new villages/communities) had a 20% fall in revenue, and a 25% decrease in earnings (to $26.4m).  Lower unit resales was a big component of the revenue decrease, and costs increased (including associated with a significant marketing campaign).

Retirement revenue was up 64%, with an increase in units and unit price in the Freedom offering driving the increase.  However, a very significant increase in marketing (including to drive H2 sales) and other expenses resulted in an earnings decrease of 74%, to $2.3m.

Non-Retirement earnings decreased 7% to $28.7m, as timing of sales impacted, and the final exit of this business draws closer.  With the sale of Gasworks Brisbane, residential land estates are Aveo’s only material non-retirement asset.

Aveo’s net tangible assets per security increased 8% to $3.63 – assisted by the sale of Gasworks Brisbane at a healthy premium to book value.  (Aveo’s security price as at COT yesterday was a substantial discount to this, at $2.63.)

In relation to the outlook, FY-18 guidance was maintained – for 20.4cents earnings per security.  This means a significant skew to H2, which was in train because of the timing of new developments being finished and is going to be further compounded by the improving sales rates and volumes.

Aveo Half Year

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Primary Health Care

Primary Health Care’s revenue increased 5.9% and underlying profit increased 5.0%.

At a divisional level, Pathology revenue increased 5.8%, and earnings increased 3.1% to $52.9m.  Revenue from Medical Centres moderately increased 1.5%, with earnings decreasing 18.2% to $22.0m.  The transition to a new GP contracting model continues, with GP recruitment ahead of the pcp and retention rates are in line with industry norms.  Imaging revenue increased 10.1%, and earnings increased 14.7% to $16.4m – a good result.

Strong cash generation was a positive note, which assisted with a reduction in net debt and a modest reduction in gearing (to 29.3%).

The company is continuing its measured expansion, with four new medical centres, an IVF clinic, day surgery, and a high‐end Imaging site to be opened this financial year.

Underlying FY-18 NPAT guidance of $92m to $97m was re‐confirmed.

Primary Health Care