Investment Matters

What Matters this week: company results, oil and the Commission

It was actually a big week for company results with a number of companies reporting for the six months ending 31-Jan-18 (unless another date is specified).

Defying the retail trend, Kathmandu released a good result, with sales up 4.3%, and profit up 23.0% (in NZ terms, being a NZ-based company).  Sales of more full-price / less on-sale clothing resulted in the margin increase.

It is planning to expand overseas including into the US, leapfrogging an acquisition of Oboz - a US-based footwear company (announced as part of the results release, along with a ~NZ$50m capital raising).  Rather than their own-branded stores, it plans to do wholesale distribution, selling through outlets such as outdoor co-ops (which are big in the US, e.g. REI).  The wholesale model somewhat mitigates the risk of a Bunnings UK style failure, but is still risky given outdoor clothing retailers in the US  (Colombia, Helly Hanson, Eddie Bauer, et al, along with brands such as North Face, Patagonia and Marmot) are good and cheap and everywhere.

Also releasing results was TPG Telecom.  Underlying earnings were up 4.9%, or flat without the benefit of lower tax.   Notably, it results showed earnings pressure as customers transition to the NBN (NBN = lower margin for the internet retailers), and thus the result was okay given the tide it is swimming against.  But with the medium-term impact of more transitions to the NBN, and a decline in subscribers over the half (for the first time) pointing to churn issues, that tide may get stronger.

International agricultural chemical and seed company, Nufarm, released a big, but expected, fall in profit vs the pcp (prior corresponding period), -46%.  A plant shutdown and conditions in Latin America contributed to this.  The company is upbeat, especially as acquisitions will contribute fully to growth in FY-19.

Myer.  Dear oh dear.  Wry & Dry has commented on the interim CEO. But as to the numbers: same store sales decreased 3.0%, or -3.6% when the smaller store footprint is taken into account (results for the 26 weeks ending 27-Jan-18).  This contributed to an underlying profit decline of 36.1% to $40.1m, with an additional $516m of losses (mainly intangible write-downs, i.e. the Myer brand and goodwill is worth significantly less than previously thought).  Is the issue with Myer systemic - Myer just isn't the place to shop anymore?  This question may end up being moot anyway as it is too late to do a capital raising (to address covenants, share price too low), and may also be too late for a new CEO / major strategic change to save the business (not enough time for it to work, given the downward spiral in operational momentum).

Sigma, pharmacy wholesale and distribution, had a 10.5% fall in profit for the half year, as compared to the pcp.  The market was disappointed; share price -7.4%.

New Hope Coal, principally a thermal coal producer, proved it is a cash machine - supported by strong coal prices, along with a 10% increase in sales.  Cost pressures are becoming evident, as has been mentioned in relation to other resource companies in recent weeks.  Profit was up 111% vs pcp to $115.6m.  Government coffers will be happy.

Other points of interest:

The share prices of energy producers, such as Woodside Petroleum, Oil Search and Beach Energy, have had a good week.  This is on the back of a buoyant WTI oil price this week.

The share prices of the big-4 banks continue to be under pressure, driven by the biting Financial Services (mainly banking) Royal Commission.  This week more wrongdoings, likely fraud and systemic failures of systems and culture were exposed.  The following chart provides a comparison of the share prices of the banks vs the market, showing the impact the commission is having (and the impact is actually worse than the chart implies as the banks themselves are a major component, ~25%, of the All Ordinaries XAO market index, and thus they have been dragging the index down.)

Source: IRESS, First Samuel, Banking Royal Commission Website

Please note we intend to update this chart as the Royal Commission holds more hearings in the future.  This chart does not account for other factors that may impact the share price of one or more of the banks.