Wealth Managed - 23 August 2016

By David Lane - August 24, 2016

Casual observers of the Australian share market could be excused for thinking the market has been quiet and stable over the last few weeks. Those who may have seen the daily close of the ASX200 index in between Olympic events would think not much has been going on.

In fact, throughout the month of August is actually one of the most frenetic times in the markets, with the majority of listed companies (those with 30 June balance dates) required to announce their annual results to the market.  As we have moved through reporting season, the individual share prices of companies have been impacted by the market’s interpretation of the results.  In many cases, this has resulted in severe swings in share prices and has heightened volatility on a stock-by-stock basis.

While the index has remained reasonably constant at around 5,500 index points, the intraday moves of the companies who ‘missed expectations’ have been treated harshly, while those that have provided positive surprises have jumped well.  As has been the trend for many years, the share price reaction has had more to do with how the results compare to analyst expectations than to the quality of the result itself.

This time of year often provides the market with a barometer for the year ahead, with company management usually providing some guidance on their expectations of the year ahead, together with some indications of activity for the initial months of the new financial year.

In spite of the fact that market expectations have been relatively low, the reporting season so far has been reasonable.  The majority of companies have reported in-line with expectations, while a few have announced results or guidance ahead of expectations.  CEOs have been cautious of the outlook for the year ahead, although not many are anticipating conditions to get worse.

Further insight will be gained on the outlook for the economy and company earnings this week, as the results of over 130 listed companies will be released.

Detailed below are some of the notable results to date, for the companies that we regularly follow for our clients.

Company News

For the company results below, the share price quoted is as close of business 22 August 2016, with the movement (+/-) being the price variance since announcing the result. Source: IRESS Market Technology.

Amaysim (AYS) $2.00 +11.4%

AYS announced its full year results for the financial year 2016, achieving underlying EBITDA of $35.4 million and a closing subscriber base of 966,000 as at 30 June 2016 across the Amaysim group. The company reported improvements in churn, percentage of customers paying online and the profitability of its subscriber base.  The Vaya acquisition has helped the business, and management expect this will continue to enhance its growth potential through additional NBN subscribers.

Duet Group (DUE) $2.65 +6.4%

DUE reported that its net profit (excluding the impact of significant items) surged 153.5% to $195.2 million in the last financial year. The energy utility asset owner also says its revenue rose 29% to $1.64 billion, and its EBITDA rose 20.8% to $946.8 million. The company declared a distribution of 9 cents per stapled security. This brings the total distributions this year to 18 cents, in line with its guidance.

Medibank Private (MPL) $2.72 -8.7%

Medibank notched up a strong 46% jump in its annual profit, boosted by the strength of its core health-insurance business. Net profit rose to $417.6 million in the 12 months through June from $285.3 million a year earlier. Health-insurance premium revenue for the year was 4% higher at $6.17 billion, more than offsetting an 11% fall in revenue from complementary services to $569.3 million.

Treasury Wine Estate (TWE) $11.03 +15.5%

TWE, owner of the iconic Penfolds brand and one of the world's largest winemakers, said its annual net profit more than doubled, reflecting strong growth in the Asia region. The company reported a net profit of $179.4 million in the year through June, up from $77.6 million a year earlier.

APN Outdoor (APO) $5.33 -35.3%

One particularly severe reaction was the 35% drop in the share price of APN Outdoor Group (APO), the billboard advertising business.  In spite of the company announcing a 10% increase in revenue, 46% increase in net profit and a 44% increase in dividends, the market was disappointed.  The company’s outlook statement disclosed a significant reduction in market activity, which they had attributed to the extended election process, leading into the Olympics.  Hence, the guidance provided for FY17 has been reduced (or, in market parlance, management released a ‘profit downgrade’).  

AGL Energy Ltd (AGL) $18.96 -6.9%

AGL expects lower margins for its wholesale natural-gas portfolio in the coming financial year after buying a higher-than-anticipated proportion of gas for the first quarter from the spot market and other short-term sources.    While recent gas-market constraints on Australia's east coast aren't expected to have any effect on the energy company's ability to meet customer demand, the company said unusually high gas prices due to strong demand would have an impact of about $35 million on its pre-tax wholesale gas margin in the first quarter of the 2017 financial year.  AGL’s headline result was a loss of $408 million due to the previously announced write-down of assets.  The underlying profit after tax rose 11.3% to $701 million, on a 4.4% improvement in earnings.

IRESS Limited (IRE) $12.15 +13.9% 

IRESS’ share price jumped following the company’s announcement of a statutory net profit for the six months to 30 June 2016 of $32.7 million, up 22% over the prior half and up 15% over the previous corresponding period. Operating revenue increased to $194.3 million. On a constant currency basis, this is an increase of 8% on the prior half and 14% on the previous corresponding period. Segment Profit, a measure of IRESS’ core underlying performance, was $63.1 million. On a constant currency basis, this is an increase of 6% on the prior half and 11% over the previous corresponding period.

AMP Ltd (AMP) $5.40 -6.7%

AMP notched up a slightly higher half-year profit as strength in its capital, banking and New Zealand operations struggled to offset higher wealth protection losses and challenging investment market conditions.    Net profit rose 3.2% to $523 million in the six months through June from $507 million in the same period the year before. Stripping out the impact of market volatility, accounting mismatches and other items, the company said its underlying earnings for the period fell by 10% to $513 million. Revenue for the period was 29% lower at $6.1 billion, compared with A$8.6 billion last year. Still, the Australian wealth manager said it was holding its interim dividend steady at $0.14 a share.

Sonic Healthcare Ltd (SHL) $23.39 +5.6%

Sonic reported a 30% rise in annual net profit, as a strong performance from clinics in countries from the U.S. to Germany helped to offset the impact of proposed cuts in government subsidies on its Australian business. The Sydney-based company, which provides pathology testing and diagnostic imaging, reported a net profit for the year through June of A$451.4 million (US$347.5 million), compared to A$429.8 million a year ago. Directors declared a final dividend of 44 cents a share, bringing the full-year payout to 74 cents. Annual earnings before interest, tax, depreciation and amortization--or EBITDA--totalled A$880.4 million. After stripping out the impact of currency swings, Sonic said EBITDA of A$837.3 million was in line with prior guidance for between A$815 million and A$840 million. 

Fletcher Building (FBU) $10.02 +9.7%

FBU reported net earnings of $462 million for the year ended 30 June 2016, compared with $270 million for FY15. The result included significant items totalling $37 million. Net earnings before significant items were $418 million, 5% higher than the prior year. Operating earnings (EBIT) were $719 million, compared with $503 million in the prior year. Operating earnings excluding significant items were $682 million, up 4% on the prior year and in line with earnings guidance. Cash flow from operations increased 15% to $660 million. The increase was due to the growth in underlying operating earnings and reductions in working capital. A final dividend of 20 cents per share will be paid on 12 October 2016, with full New Zealand tax credits attached, bringing the total dividend for the year to 39.0 cents per share. The dividend reinvestment plan will be operative for this dividend payment.

Crown Resorts (CWN) $13.73 +3.3%

Net profit at Crown Resorts more than doubled last fiscal year, boosted by proceeds from the sale of some shares in its poorly performing Macau joint venture as the Melbourne based casino operator prepares to spin off most its international operations. Crown, majority owned by Australian billionaire James Packer, reported a net profit of A$948.8 million (US$730.4 million) for the year through June, compared to A$385 million a year ago. Crown's sale of 155 million shares in Melco Crown generated proceeds of A$1.07 billion and left the company with a reduced 27% stake in the venture which has been hit by a Chinese crackdown on graft. Crown announced plans in June to spin off most of its international operations into a separately listed company, severing ties with Macau, the world's biggest gambling market, where the crackdown on corruption and money laundering scared away big gamblers from the area. 

Ansell (ANN) $23.85 +21.3%

Ansell shares responded positively to the full year result, in spite of a 4% decline in EBIT to A$236.7 million.  In constant currency, the result was 8% higher.  Reported sales were US$1,572m, down 4% year-on-year, but in line with FY15 in constant currency. The company said it was experiencing continued good performance of growth brands in Industrial, Sexual Wellness & Single Use, with further strength in the second half.  The Medical division was effected by weak emerging markets and short term operations variances. Operating Cash Flow was 25% stronger than last year. Increased full year dividend up 1.2% to US43.5¢. Final dividend of US23.5¢. The result itself was not enough to excite the market.  It was the announcement by management that it was exploring options for the potential sale or split of the Sexual Wellness business from the rest of the company that sent the shares higher.

Orora Limited (ORA) $3.08 +10.4%

Orora, the Australasian and North American packaging business that demerged from Amcor in 2013, announced Net Profit After Tax (NPAT) up 28.3% to $168.6 million, on sales revenue of $3.8 billion, up 13.0%. Final ordinary dividend of 5.0 cents per share, 30% franked. Total dividend is 9.5 cents, up 26.7% and represents a pay-out ratio of 67.4%. The company’s net debt was $630 million, up from $607 million at 30 June 2015.  Leverage was 1.7 times, down from 1.9 times at 30 June 2015 and interest cover was 9.2 times, up from 8.5 times.

JB Hi-Fi (JBH) $29.50 +7.7%

Consumer electronics retailer JB Hi-Fi said annual net profit rose 12% as it rolled out more stores and the closure of rival store network Dick Smith boosted sales of computers and audio equipment.  The shares jumped further after the company said its gross margin increased despite steep discounting by Dick Smith as it tried to shift stock from early December. Updating the market on the start to the current financial year, JB Hi-Fi said sales surged by 13% in July, compared with a rise of 7.6% in the same month a year ago.  After the initial jump, where the shares popped through $30, the shares settled as Brokers downgraded their forecasts and recommendations due to the shares being fully valued.

Aurizon Holdings Ltd (AZJ) $4.61 -7.8%

Aurizon’s result missed market expectations, with its annual profit slumping by 88% because of large write-downs. The company has stopped buying back shares to focus on options for growth. The Australian rail operator reported a net profit of A$72 million (US$55 million) for the year through June, down from A$604 million in the 12 months prior. Profits were weighed by pretax impairment charges totalling A$528 million, including write-downs against its investment in Aquila Resources and its locomotive fleet.  Revenue fell 9% to A$3.46 billion, partly because of weaker freight volumes, it said.

Mirvac Group (MGR) $2.28 +6.0%

Real estate company Mirvac Group said net profit rose 69% driven by upward revaluations of its properties. The company reported a net profit of A$1.03 billion (US$790 million) for the year ended June 30, compared to A$610 million a year earlier.    Operating profit after tax rose by 6% to A$482 million, which was at the top end of the company's guidance range. The company also said it expects earnings per share of between 14 Australian cents and 14.4 Australian cents in fiscal 2017, and expects a full-year distribution of between 10.2 Australian cents and 10.4 Australian cents. 

Sydney Airport (SYD) $7.55 +2.0%

Sydney Airport continued to benefit from strong growth in passenger numbers, with 20.3 million passengers going through the airport in the first half.  International passenger numbers were 9.3% stronger, while domestic growth was 5.3% better.  EBITDA rose 9.5% on the previous corresponding period, while revenue grew by 11.3%. Although operating expenses grew due to investment in improved standards, the EBITDA margin remained steady at an impressive 81%.  Management are still reviewing the proposed Western Sydney Airport, and are yet to make a decision in relation to their right of first refusal over the proposed development.

Transurban (TCL) $11.87 -0.02%

Transurban’s 17.5% growth in revenue came from improved network traffic and further portfolio development.  EBITDA rose 14.8% to $1.248 billion, with Net Profit of $148 million. The unitholder distribution of 23 cents per share brought the full-year distribution growth to 13.75%.  Management have forecast distributions of 50.5c for FY17. Importantly, distributions were 103% covered by free cash flow.

Primary Healthcare (PRY) $4.15 +1.5%

Primary’s result was in-line with market expectations. Although the EBIT ($206.6 million) and NPAT ($104 million) were both down on the previous year, this was reflective of the changes to the business implemented through the year, and the sale of the Medical Director business.  Revenues were stronger at $1.651 billion (+3.2%), and the focus on capital management and balance sheet repair reduced the company’s finance costs by 12.8%. The Pathology division increased revenue and earnings, in spite of challenging conditions and the prospect of government cuts through the period.

Lend Lease (LLC) $14.43 +2.3%

Lend Lease delivered double digit earnings growth, and has a positive outlook for the next financial year. The company announced a 13% increase in NPAT of $698.2 million, while generating operating cash flow of over $850 million.  Through FY16, LLC deployed $3 billion into the development of new projects. Encouragingly, the company settled over 1,200 apartments, with non-settlements below 1%, which is under LLC’s historical average of 3%.  Management are positive on the future outlook, with a development pipeline of $48.8 billion (+9%) and residential pre-sales up 13% at a record of $5.9 billion.

Dexus Property Group (DXS) $9.47 -0.06%

Australia’s largest office landlord – with over 1.8 million square metres of office space – announced an 104% increase in Statutory Net Profit, driven largely by property revaluations. Net Tangible Assets (NTA) grew by 85 cents, or 13%, to $7.53 per security, while distributions per security increased by 6%.  Dexus completed 385 leasing deals, across 269,899 square metres across the year, and has maintained a respectable 96.3% occupancy across its office portfolio.

News in Review

  • The US’s headline CPI figure came in flat in July and continues to point to a relatively benign inflation backdrop that does little to prompt the Federal Reserve policy makers to hike interest rates. Transportation services were the main source of the weakness, primarily due to an unusual plunge in airfares.
  • China’s booming property market showed feint signs of cooling, as new home prices rose in 51 of 70 cities in July, down from 55 in June and a peak of 65 in April. While the modest decline supports the argument that one of the key drivers of the Chinese economy is losing steam, it will be welcomed by policy makers who have been worried about an alarming property bubble developing.
  • The Australian Bureau of Statistics July labour force report revealed a 26,200 rise in employment, which was above market expectations and edged the unemployment rate down to 5.75%. The rise was the net result of a 45,400 decline in full-time employment offset by an unusually large 71,600 jump in part-time employment (70,000 polling officials were hired for the Federal Election).
  • The Australian wage price index came in line with market expectations in Q2 of 2016, rising a modest 0.5% over the quarter and leaving annual growth at just 2.1%. Across Australia’s industries, wages growth was strongest in the electricity sector at 2.6%, and in education and training at 2.5%. Growth was slowest in administrative and support services at 1.4%, and wages growth in construction was also weak at 1.5%. 
  • The German economic sentiment index bounced to 0.5, up from a woeful -6.8 in July following the shock ‘Brexit’ vote. Political risks within and outside the European Union, however, may continue to inhibit a more optimistic economic outlook for Germany. Growth in Europe's largest economy slowed less than expected in the June quarter as higher exports, strong private consumption and increased state spending compensated for weaker investment in construction and machinery.
  • The UK’s 12-month consumer price index rose 0.6% in July to its highest level since November 2014 and is expected to continue to rise as the pound battles weakness against the dollar and euro. The main contributors to the increased rate were rising prices for motor fuels, alcoholic beverages and accommodation services.
  • US retail sales were flat in July as Americans cut back on purchases of clothing and other goods, pointing to a moderation in consumer spending that could temper expectations of an acceleration in economic growth in the third quarter. 
  • China’s CPI inflation edged down to 1.8% in July from 1.9% in June, with food inflation easing as lower pork prices offset the impact of the rising cost of vegetables following recent heavy rain and flooding. While the pace of CPI growth is well below the government’s annual target of 3%, low inflation provides China’s policymakers plenty of scope to ease monetary policy to stoke economic growth.
  • The NAB business survey found that while conditions in Australia fell in July, from 11 to 8 points, they are still well above the long term average. The confidence is also broad-based in nature, with conditions remaining positive in all states and territories except Western Australia. NAB also updated its economic forecast, expecting growth to remain resilient at 2.9% in 2016 and 2017. Both global and domestic disinflationary pressures are expected to keep CPI inflation below the 2-3% target range for an extended period.
  • The Westpac-MI consumer confidence index recovered slightly to 101.1 in August from July’s 99.1, indicating that there are now more people in Australia optimistic about the economy than pessimistic. Over the last thirty months there have only been eight when optimists have outweighed pessimists with three of those months figuring in the last four. In particular, prospects for the housing market appear to have been boosted by the recent rate cuts. The confidence of those respondents who hold a mortgage lifted by 7%.
  • Australia’s mean inflation expectations for August fell to 2.2% from 2.4% in July, giving credence to the RBAs August interest rate cut and confirming the ongoing presence of a disinflationary environment in the domestic economy. 
  • China’s trade surplus widened to $52.3 billion in July from $48.1 billion in June. Exports rose 2.9% YoY, which was a slight improvement on June. The wider surplus was largely attributed to weakness in imports, which fell 10.5% YoY versus expectations of a 7.0% decline.  The decline in imports can be expected given the Chinese economy’s gradual transition from industrial lead to consumer and services driven growth. 
  • In the UK, the latest RICS survey showed British housing market activity weakened the month following the ‘Brexit’ vote, with gauges of house price growth and transactions falling to the lowest level in three years.

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