Investment Matters

What Matters this week: Blue Sky, Bramble's, Healthscope & Westpac

It has actually been a big week of news – but mostly overshadowed by the Financial Services Royal Commission.

Blue Sky’s CEO ‘resigned’ (the degree of willingness is generally questionable when a permanent replacement is not in the wings).  Additionally, two executive directors – i.e. directors with management / operational roles in the company, have resigned from the Board (but will continue their management roles) [please refer to recent editions of What Matters for the history].  And what speaks volumes is how many shares each reported as owning on the day they resigned.   Yep.  Zero.  Zilch.  Key people in the company don’t think it is a backable investment, so why should anybody else? This follows questions surrounding the share-trading history of the previous CEO and Founder. 

The Government has essentially blocked examination of ASIC’s performance (or lack thereof) from the scope of the Financial Services Royal Commission.  But even so, the number, extent and duration of failures in the sector are indirectly making the apparent abject failure of the regulator hard to ignore.  But it isn’t just in financial services.  Shareholder class actions, especially in regard to non-compliance with disclosure obligations, are becoming the norm.  I guess if shareholders can’t get prevention and remedy through regulatory oversight, they take it onboard themselves.  The latest is in regard to Brambles’ disclosure (or lack thereof) regarding profit guidance for the FY-17 year.  And, surprise surprise, a substantial shareholder class action has been mooted for AMP.

But Brambles’ FY-18 year is looking okay; it announced 5% growth in Q3 revenue (constant currency).

By contrast, building products company Boral, announced weaker than expected earnings, impacted by US weather conditions.  Market not impressed: -8.6% on the day of the announcement.

The 99-year-old takeover proponent for Godfrey’s vacuum cleaner retailer may well get his desired 100th birthday present.  This follows an announcement from the company that trading conditions remain tough, and it will now likely need to rely on a waiver of a debt covenant (leverage ratio) as at the end of the FY-18 year.  The apparent lack of success turning the company’s earnings trajectory doesn’t provide confidence it won’t be in breach at the next non-waivable covenant test date (28-Dec-18).

Is iSelect’s business model past its time?  (iSelect provides product comparison services for many sectors including energy, telecoms, and health, life and care insurance.)  The question comes after a shocking downgrade (-64% FY-18 forecast EBIT = 55.5% fall in the company’s share price).  As a consequence, the CEO has ‘resigned’ (again with no replacement in the wings).

AGL Energy has further given the brush off to the Government – announcing it will build a new gas fired power station near Newcastle (NSW).  It only replaces part of the Liddell capacity, but there is other planned capacity planned (e.g. Bayswater expansion) – and they do have until end of 2022 to close the capacity gap.

Myer has, finally, a new (and brave) CEO / MD.  He is well credentialed, having turned around UK department store House of Fraser.

Wesfarmers’ Q3 sales update showed some green shoots in the Coles supermarket operations – timely given the proposed de-merger of Coles.  And in a parrot from previous periods, Kmart, Officeworks and Bunnings Australia delivered strong results, Target sales continue to be under pressure and Bunnings UK is a basket case.

Things that go around come around.  Private hospital and pathology provider, Healthscope, may be on the private equity cycle again, with a conditional takeover proposal being made this week at $2.36 per share (a 16.2% premium to last close).  And they don’t seem afraid to pay up for the opportunity:  23.6x forward (FY-18e) P/E, at a share price of current share price of $2.35 (source: IRESS consensus estimates).

Westpac shares were dumped this week, driven by fall out from the Royal Commission.  UBS released a report highlighting significant concern about loan quality on a sample of 420 loans for which information was provided to the Commission (share price -3.6% on the day details of the UBS report went to press).  Also, ANZ announced a $632m provision on the sale of two of its wealth businesses and this is set to grow. 

And to wrap, given the further sensational (negative) developments from the Royal Commission this week, we provide an update to our graph showing the impact on shareholders:

Source: IRESS, First Samuel