Investment Matters

The Budget: a strong positive for clients' investments. Banks. Myer. Fairfax.

The week kicked off with three significant pieces of news:  Westpac's profit was as expected, Fairfax had a partial takeover bid and Myer's share price slumped (again).  We will focus on the banks later. 

As Fairfax journalists continued their strike, private equity player TPG lobbed a takeover proposal (non-binding and indicative) at 95cps for the assets it wants (including Domain and the three newspapers The Age, SMH and AFR), but excluding assets it doesn't (including Stan, NZ publishing and regional papers).  The latter would be scripted into a new listed entity.

Also on Monday, Myer's share price slumped another 9.5% to a low of $1.00.  Readers will recall that it was re-listed out of a private equity company (anyone remember the glossy Jennifer Hawkins prospectus?) in Nov-09 at $4.10, equating to an annualised return of -17.1%. 

The fall was predicated on weak retail sales and a thought bubble from economist Josh Williamson of Citigroup - that the retail sector is bordering on recession (from what we are seeing in the retail REITs [listed property trusts], possibly a correct thought bubble).  And this is before Amazon arrives in town.  The company's third quarter sales update released on Thursday did nothing to dissuade the market that the outlook was wrong - with sales down 2.0% (same store basis).  Full guidance for earnings growth in FY-17 (as compared to FY-16) was affirmed.  However, there is considerable doubt in the market about the reality of this.

CSR's (manufacturer and supplier of building products in Australia and NZ, as well as operator of an aluminium smelter) share price took a tumble after it released its results for the year ending 31-Mar-17.   But the share price just fell back to where it was in late April.  The CEO called the top of the building cycle in Australia.

Qantas' sky high >20% share price increase in the last 3 weeks was not received well by a pie thrower, taking aim at Alan Joyce (the company's CEO).  Actually, the pie thrower was protesting about the company's support of same-sex marriage.  Mr Joyce was the none too happy, and he intends to press charges.

Graincorp was the happy story of the week. It released its first half results for the period ending 31-Mar-17.  Record grain crops contributed to a stronger than expected result, with 21% growth in profit. 

What a week the big 4 banks had!  Westpac kicked it off with their results release on Monday (for the 6 months ending 31-Mar-17).  Their result was in line with consensus estimates.  It had little revenue growth, good cost control, and there are moderate residential loan-growth expectations.  The Commonwealth Bank (CBA) then released a trading update for the third quarter, with it generally being considered softer than expected.  Although the cash profit was in line with expectations, the composition showed some weakness - benign revenue growth offset by impairments being better than expected (which may not be sustainable with the current constrained wages growth and economic outlook).

The post-budget squealing from the big 4 banks (and Macquarie) started with earnest on Wednesday, and escalated on Thursday.   But the louder the squeals, the deafer the ears upon which they fell - in fact there mostly cheers from the general populous.  Given this, it is highly doubtful any politician - well perhaps except the extreme right wingers in the government - will be silly enough to vote against it.  Some thoughts:

* From the banks perspective, they are already up against it, with pressure on revenue and earnings, arrears under control but generally trending up, another round of regulations / increased capital coming, and now a new levy.  The new levy will have a meaningful impact on profit (assuming it can't be passed on in full to customers in the current quite competitive environment).

* Commentators vary, but the lower cost of funding the big 4 get as a result of the implicit Government guarantee has been highlighted.  The new liability levy is seen by some as a way for them to pay a price for this guarantee.

* The market reaction was actually, we consider, quite muted compared to the significance of the announcement.  CBA, WBC and NAB traded down 0.4%, 0.7% and 0.7% respectively on the post budget Wednesday.  ANZ's share price actually increased 0.8% - nothing to do with the budget, rather a slight recovery after its post-results (released last week) sell down.