Investment Matters

Company Profit Reporting Results

Cardno

Upon an initial look at Cardno’s result, one might be disappointed.  But it is actually a quite pleasing result.  The US corporate tax cut has a negative (but non-cash) impact on companies with tax losses on their balance sheet – these losses can be used to offset future tax gains, but because the tax rate was lowered, these losses are in effect worth less. And an associated tax charge needs to be taken through the income statement.  For Cardno, this was -$32.9million.

Cardno’s US operations showed a meaningful increase in EBITDA (earnings before interest, tax, depreciation and amortisation) margin (although still not at an acceptable level at 3.6%), but a decrease in revenue.  We look for a return to revenue growth, as well as further improvement in the margin, into FY-19.  There is significant leverage in the company’s overall profitability when this occurs. Australian operations disappointed a little as a number of the large projects finished and there weren’t immediate ones as replacements.  Looking into FY-19, we assess this will reverse based on the company’s business development efforts, as well as the general infrastructure spending outlook.

The company’s International Development division performed well – considerably better than the PCP (H1 FY-17), but a little under H2 FY-17. EBITDA guidance of $55-60m for FY-18 was reaffirmed (EBITDA for H1 was $30.2m).  Overall, this result clearly shows that Cardno has turned the corner - both operationally and financially.


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CML Group

The standout of reporting season.  There was a 16% increase in invoices funded, which drove a 31% increase in revenue.  EBITDA increased 31% to $7.8m.  Underlying earnings on a per share basis increased 50%, with the dividend raised by the same percentage. Increased invoicing volume, along with a higher margin, drove the increase in revenue.  This trend is expected to continue, with an expansion of the sales team, rollout of new technology to assist client acquisition and retention, and entry into the equipment finance space (expected to make an earnings contribution from H2 FY-18).
The company reaffirmed it FY-18 guidance for EBITDA of $15.5m.  This guidance is pre the impact of an acquisition (more on this below).  Additionally, we weren’t expecting FY-19 initial guidance (including the acquisition) to also be provided – for EBITDA of $19.5m; 25.8% growth.  And we expect growth at the profit level to be even greater, as debt refinancing will considerably reduce the company’s interest expense.

CML2 

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BHP

BHP’s H1 result showed strong revenue growth, driven by higher commodity prices. Production volumes (H1 FY-18 vs H1 FY-17) were 7% lower for petroleum, 17% higher for copper, flat for iron ore, and down around 1% for coal.  H2 is looking to be generally stronger than H1 - full year FY18 production guidance is unchanged, excluding a downgrade for met coal. Cost inflation, as we have seen with South32, became evident.  It was greater than we were expecting, especially given BHP’s focus on productivity and efficiency.  FY-18 vs FY-17 unit cost of production is expected to be 13% higher for conventional petroleum, 8% higher for Escondido copper, 11% higher for Queensland coal, but 4% lower for WA iron ore.

Overall, revenue increased 15.9%, and underlying profit increased 25.0% - the latter assisted by a considerably lower adjusted effective tax rate, and a moderate growth in depreciation and amortisation (compared to revenue growth). The dividend increase was stronger than we expected, to US55cps – reflecting a 72% payout of underlying profit (policy = minimum of 50%).

BHP table

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Pact Group

Pact is still facing difficult conditions.  Although revenue increased 11%, EBITDA was flat.  The margin was impacted by adverse currency movements, lower pricing on contract extensions, and higher costs in Australian rigid packaging. Higher depreciation and amortisation flowed to the profit line, with a 4% fall of underlying profit vs PCP.

The company reaffirmed its full-year guidance for higher revenue and underlying earnings in FY-18, as compared to FY-17.  Revenue growth achieved in H1 is expected to continue in to H2, based on the diversification strategy which has been implemented (including recent acquisitions and contract awards).  A focus on efficiency will continue to respond to costs headwinds.

Pact Group

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Southern Cross Media

Southern Cross Media’s H1 results were a little disappointing, but not as bad as the table below implies.   Southern Cross sold its Northern NSW TV operations.  Without this, group revenue would have increased 1.3%.

H1 FY-17 EBITDA was $92.6m.  However, adjusting for the NNSW asset disposal it was $87.5m.  The H1 FY-18 EBITDA was $78.1m; a 10.7% fall. 

Regional TV and Radio revenue grew (excluding NNSW TV) 4.6%, but with costs growing at a slightly higher rate, earnings from this division increased 2.1%.

Metro radio revenue decreased 3.0%, impacted by Sydney’s 2DAY FM station and the Triple M network.  With flat expenses, earnings fell 12.3% from this division.

Strong cash flow conversion meant company debt was further reduced ($472.6m Dec-15 vs $324.8 Dec-17), and the dividend was comfortably held at 3.75cps (fully franked) - which equates to a yield of 9.0%.

It has been a positive start to H2, with group revenue up 5% year on year for Jan/Feb-18 (excluding NNSW TV).  Full year cost outlook is flat vs pcp.

Southern Cross media