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Earnings first take

Reporting Wrap

February 28 marked the end of Australia’s official company reporting season. The companies that comprise the main index – the Australia 200 – have revealed their results for the half year. On balance the 186 reports (there are always a few laggards) paint a positive picture of the corporate landscape, but there is significant variability across sectors and individual stocks.

According to Bloomberg a highlight is sales growth of 9.1%, averaged across the top companies. That’s around 3% higher than consensus forecasts, and every official sector reported sales gains. This clear indication of increased activity is pleasing news for the Australian economy. However the consumer goods and services sectors lagged the general increase, growing by 0.5% and 4.7% respectively. There is still plenty of caution among consumers, and the results support the idea that inflation remains subdued.

Earnings also grew, by around 8.1%. In contrast to sales this is approximately 2.5% below consensus. A miss of this size could see pressure on sectors and the market as a whole once the largest institutional investors have digested the results, and begin re-balancing their portfolios. Earnings slipped by 4.5% in the Telco sector, the only negative earnings reporter. Telstra shareholders should take particular note.

Bloomberg’s aggregation gives the top performing sectors for earnings growth; Consumer goods (+55.3%), Utilities (+48.3%), Technology (+31.2%), Oil and gas (+22.4%) and Materials (+19.5%). Investors looking to expand their portfolios must form their own view around earnings momentum, but these sectors may be a good place to start.

There were a number of disappointments. Stocks trading on higher earnings multiples that failed to meet forecasts were trounced. I took a hit on Dominos Pizza (DMP). Its same store sales increase for the half year was just 4%. Although DMP reiterated its guidance for full year profit growth of 20% the sceptics took control of the share price, and the drop below $40 meant stop loss selling. Brokers and analysts remain divided on DMP, and a number have target prices centred around $55 per share, but investment discipline means I’m out.

Blackmores’ shares also plummeted after their announcement. Although profit grew by 20%, and the story remains largely on track, the lower growth in sales saw brokers deflate share price valuations as they lowered their estimated price to earnings ratios. Tech companies Getswift (GSW) and Wisetech (WTC) tumbled after guiding lower, albeit for different reasons. Shares in Retail Food Group are suspended after the company failed to lodge its report.

Shareholders in a2 Milk (A2M) are clear winners this season. A 150% profit increase and new alliances with major industry players saw the stock price take off from what was already record highs. Shares in A2m have quadrupled in less than a year, and it is now New Zealand’s largest company by market value.

Stocks with lower PE’s that jumped on modest improvements were a feature. Qantas (QAN), Fairfax (FXJ) and Nine Entertainment (NEC) all recorded good gains after beating fairly low expectations. A number of travel stocks took the spotlight, and Corporate Travel and Webjet both saw strongly positive investor reactions. Good news from tech stock Altium and share services group Computershare were also well received.

The following are the real time responses from our Strategy and Analysis team:

Adelaide Brighton – steady not stellar

Adelaide Brighton (ABC) disappointed shareholders with a 2.3% drop in headline profit despite a steady 7.8% rate of underlying earnings growth.

One-off costs attributed to re-structuring and acquisition expenses will likely be overlooked by investors. However the typifying of bad and doubtful debts as one-off may attract attention. The negative headline is offset to some extent by price increases for ABC products above the rate of inflation.

Despite committing to capital expenditure of $100 - $110 million, the company declared its highest dividend ever at 12 cents per share. Additionally investors will receive a 4 cent special dividend. The pay-out continues ABC’s policy of returning excess capital to shareholders.

The problem is that ABC’s shares traded to a record high at $7.05 in the lead up this results announcement. In early trading the stock is down heavily and giving indications of a return to a trading range between $6.40 and $6.60.

Bluescope Steel - announces buy back and expects a sharp second half improvement

At $516.8m, Bluescope Steel’s underlying EBIT for H118 was pretty much in line with the second half of last year.

However, company expects H2 F18 to produce a lift of 25% in underlying EBIT. This will bring the full year result to around current consensus. Given BlueScope’s record of conservative guidance, the actual may be better.

The company has also announced a $150m increase in its buy-back program, which should please the market.

Overall, this looks a solid result that benefitted from improved steel demand in Australia and higher prices in Australia.  The energy cost increases that many thought would weigh on results this financial year have so far failed to materialize while the outlook for steel demand is solid, particularly in the US.

The solid result and buy back should be well received positively by the market this morning.

However, Bluescope goes into this result after a strong rally. It is up 41% from December and 8.5% over the past 2 weeks but is still on an undemanding forward PE multiple for around 12.5 times

The highs of last week and early January provide potential double top resistance around $16.25. A clear break above this resistance would be positive.  The well-established up trend line provides potential support around $12.80.

Woolworths – as good as it gets

The turnaround strategy at Woolworths is delivering. Growth of 4% in overall revenue, 5% in food revenue and a 15% lift in net profit are all indicators that CEO Banducci’s strategy is on track The exception is the variety offering at Big W, a blot on this otherwise impressive first half year report.

Despite setbacks Woolworths is still in negotiations with BP, the ACCC and other unnamed parties to sell its fuel retailing business. The company declared an interim dividend of 43 cents per share, up from 34 cents.

Despite all the good news WOW shares may see a “sell the fact” reaction. The share price rose into the result, and the valuation now looks stretched at around 20x earnings. Additionally the rise puts the share price very close to stronger resistance close to $28, potentially adding further weight.

Flight Centre Upgrades

The FLT first half result showed a 37% profit increase that beat Bloomberg consensus estimates by around 12%. The company also upgraded its guidance for full year profit to $360 to $385 million (previous $350 to $380 million). These factors could see significant share price support in trading today.

Management lauded the company’s transformation program. Of note is the fact that transaction values were $10.1 billion dollars, while profit for the six months was 102.1 million. A margin of just 1% of turnover could mean volatile profit performance.

FLT declared an interim dividend of 60 cents per share, up from 45 cents. Although MD Graham Turner stated that most financial measures are at record levels a share price nearing all-time highs may mean a more modest market reaction.

Qantas posts impressive growth for a low PE valuation stock- by Ric Spooner

Underlying profit before tax was $976m. This was up 14.6% on last year and ahead of Bloomberg consensus of $945.5m

Net free cash flow for the half was $772m; allowing Qantas to announce an on market buyback of up to $378m.

The domestic operation was again the group star. Underlying profit grew 20% to $447m on the back of improved demand. Qantas domestic continues to benefit from competition discipline in terms of seat capacity.  There are advantages to being a domestic duopoly.

The improved result came despite rising fuel prices. Management have forecast that fuel prices will be no more than $3.24bn in the 2nd half due to its hedging policy

The international business continues to suffer from intense competition with underlying profit down 5.5%. However, it is holding its own in a tough market.   

Overall, this looks a pleasing result for a company trading on an unchallenging forward price earnings multiple of 8.8.

The stock has rallied off the $4.47 low and might be developing a trend channel. Other features of the chart landscape are potential for a harmonic AB = CD correction or moves to higher Fibonacci retracement levels.

a2 Milk gets an A+

In what looks like the best result of the season so far Auckland based a2 Milk shot the lights out. The numbers say it all. A 70% increase in revenue A 127% increase in earnings. And a 150% jump in net profit. Let that sink in.

The extraordinary growth exemplifies a well-run company with a superior brand strategy. Costs increased at rates well below revenues. The break down showed ANZ revenue soared 47% and pleasing progress in the US and UK. China infant formula market share increased by around 5%, but revenue trebled.

Even better, management demonstrated they have not finished the expansion. Building on their successful Synlait partnership a2M announced a strategic alliance with Fonterra to increase supply into the a2 chain.

Before the announcement A2M shares were trading just below the all-tine high at $8.82. In trading this morning the stock jumped through the $10 mark. Little wonder.

Wesfarmers a mixed bag - by Ric Spooner

Wesfarmers underlying net profit after tax fell 2.7% to $1.535bn. Depending on what figures you use, this result is at or slightly below average expectations.

The headline profit fell to $212m but this included previously flagged write offs relating to UK hardware and Target.

The result was a mixed bag in terms of performance.

Coles, which is by far, the biggest business continues to face headwinds. Its comparable store sales were up 0.9% in the 2nd quarter. Management reported strong growth in transactions; however, price discounting offset much of these gains and took its toll on EBIT, which was down 14.1% for the year

The UK hardware operation is the other weak spot. It recorded a before tax loss of £97m and, as previously flagged, is under review

Bunnings Australia had another good year with the latest quarterly comparable sales up 9.1% and full year EBIT up 12.2%. Kmart also performed well while Target has stabilised its sales decline. Higher coal prices chipped in with a welcome boost. The resource division’s EBIT was up 51.4% to $209m.

Not many surprises here but the result seems unlikely to inspire a major re-rate for the stock price. The 0.9% growth in Coles same store sales may be a relief to the market and see some upside. However, sentiment may be curtailed by management comments that Coles’ second quarter results face a headwind from higher wage costs and lower convenience store earnings.

The top line of a minor triangle formation provides chart resistance around $41. A break above this would be constructive for a corrective rally.




BHP - The Big Dual Citizen Disappoints

Dual listed BHP Billiton today missed estimates at its half yearly results announcements. Although revenues rose several operational blow outs dragged on profits. The headline number was reduced by a one off charge for changes to US tax law.

An underlying US$4.05 billion (+25%) fell below average estimates in the $4.2 to $4.3 range. Expectations were raised by substantial gains in commodity prices. Problems at the Olympic Dam mine and lower coal production hurt but increased copper production at Escondida provided some offset.

Investors expecting a buy back announcement were disappointed. However a dividend well above estimates at 55 US cents (previous 40 cents) may assuage dashed hopes. Australian investors will have London and New York trading to examine investor reactions to help guide their response.

One mystery remains. A number of international, professional investors bought London listed BHP shares at a discount with full knowledge of the DLC structure. The mystery is why so many members of the Australian media want to help them in their attempt to rip value from the hands of Australian shareholders.

Invocare operating earnings beat expectations - by Ric Spooner

Invocare has beaten Bloomberg consensus with an improved fully year report

Net operating profit was $63.526m, compared to Bloomberg consensus of $60.27m

The funeral operator benefitted from favourable demographic trends; improved pricing and cost control

Apart from its lofty valuation, the market’s concern with this stock has been centred on signs that it is losing market share. Its tendency to increase prices on a regular basis has been catching up with it.

On this score, the annual report suggested things might be at pointed in the right direction. Invocare’s market share decline was 0.9% in the year to December, an improvement from -1.3% in the year to June. This improvement came despite the fact that it has facilities closed for refurbishment as Part of its “Protect and Grow” strategy designed to maintain long-term market share

The stock price has moved off trend line support and the 78.6% Fibonacci retracement level over the past 3 weeks. The slow stochastic on the weekly chart is also starting to move out of the oversold zone.  A move above the recent high at $15.88 would confirm rejection of this support

IAG trading at a premium - by Michael McCarthy

An alliance with Warren Buffet’s Berkshire Hathaway group is paying off for IAG shareholders. The insurer lifted net profit by 24% for the half year. Insurance earnings and investment income rose, and increased re-insurance meant claim costs were lower. The result is above most forecasts.

Importantly the company increased its operating margin by almost 4% and lifted its guidance for the full year. A better claims experience in commercial property and a further lift in rates drove the lift. The interim dividend is increased by one cent to 14 cents per share.

However a key issue for shareholders is the big run up in the stock in anticipation of a turn around, and the spike to an all-time high in trading this morning. The share price behaviour is sharp and erratic, and it may settle and stabilise at lower levels before resuming upward momentum.


CSL demonstrates just why its a market darling - by Ric Spooner

CSL has produced a solid beat on expectations. This should see the stock supported this morning, bouncing off chart support yet again.

Revenue was up 11% on a constant currency basis. Net Profit after Tax was up a healthy 31% to $1.086m.

The half-year result benefitted from some short term factors. A bad winter flu season produced a 43% jump in flu vaccine sales. Competitor shortages also led to exceptionally strong growth in Immunoglobulin sales.

However, the underlying business performed strongly, including a successful launch of the new product, Haegarda

Short-term factors caused CSL to note that it expected its profit result to be uneven between the first and second halves. Even so, it has upgraded full year guidance to approximately $1.55-1.6m in constant currency terms. The market is already at the top end of this range, with consensus at $1.598 and may now upgrade further.

Boral acquires growth

US exposures are of prime interest to Australian investors. Today’s half year report suggests Boral’s (BLD) expansion of its US building products operations through the acquisition of the Headwaters group is delivering growth and profits. Despite some cautious forward guidance BLD shares may see solid trading support.

Management lauded the acquisition, but the numbers tell the story. Underlying earnings growth of 58%. Profit growth after amortisation and one-offs of 13%. The 12.5 cent dividend is the highest payout from the company since 2008. The Australian arm remains the largest single contributor to BLD’s bottom line, and recorded growth of 12%.

A PE ratio at around 19 times earnings means BLD is not considered cheap. But given a stronger track record and positive growth expectations investors may still find it attractive. And a 10% share price pullback in the lead up to the result may see quick rewards for those who jump early.

Cochlear - high valuations leave little room for error - by Ric Spooner

Cochlear has reaffirmed profit guidance of $240-250m for F18.

However, market Bloomberg consensus is for F18 is for $250.8 and the first half results appear to put this at risk

The company has been saying that it expects performance in this year to be skewed towards the second half of the year. Even so, first half revenue growth was below expectations growing only 7% in constant currency terms. This flowed through to EBIT, which grew only 4%.

Sales growth was impacted by timing differences. The second half of the year will benefit from the shipment of 1491 implant units sold under a tender to the Chinese government. It is also likely that sales early in the half were down as customers waited on the new Nucleus 7 product

This looks a fundamentally solid result but with the stock trading on a forward PE multiple of 36, more may be required. The stock may struggle today despite an overall market rally

The 200-day moving average, horizontal support and resistance and a developing trend line all provide support around $161.60

JB Hi-Fi Amazes – by Michael McCarthy

Amazon who? JB Hi-Fi (JBH) shot the lights out with a half year result that showed 41% revenue growth and a 37% lift in profit. However it appears a combination of cautious earnings guidance and a sharp rally ahead of the result is pushing the stock lower in what may be a temporary sell down. The records extend to the declared dividend. Investors will receive 86 cents per share.

The integration of the Good Guys business is a key driver of the growth. Despite a slump in January sales at the newly acquired subsidiary the overall impact looks positive for JBH shareholders.

Fear of competition from international players such as Amazon means JBH is trading at a PE discount to the market. After this morning’s 7% tumble to close to $26 the PE is around 12x compared to an index PE around 16x. Investors who consider the competitive threats overstated are no doubt eyeing the details of today’s report.

Aurizon benefits from productivity gains - by Ric Spooner

Rail freight operator, Aurizon faces headwinds. It is battling with a draft decision by the Queensland Competition Authority, which has put a ceiling on revenues and is forcing Aurizon to make changes in the way it operates that it does not agree with. Its iron ore business is also under threat with Cliff Natural Resources recently announcing it will close its high cost mine and others of Aurizon's dwindling band of iron ore customers likely to follow suit

However, Aurizon’s half-yearly results released this morning beat expectations. Underlying EBIT for the half year was $485.3m, compared to Bloomberg consensus of $463m. Despite beating expectations, this is still down 5% on last year with revenue under pressure on a number of fronts

Aurizon is continuing to benefit from an efficiency and productivity program. It booked a further $42m in sustainable transformation cost benefits. Its “transformation program” has now delivered savings of $302m since July 2015 and is expected to deliver a total $380m. EBIT guidance for the full financial year has been left unchanged at 900- 960m but based on the half year numbers may be at the top end of this range or better

The stock has been under pressure leading into this result. Initial chart resistance, based on previous lows is in the $4.77/$4.92 range.

REA Group delivers a good result on a bad day - by Michael McCarthy

Online real estate trader REA Group (REA) reported a 55% decline in headline half year profit but it’s not as bad as it looks. The drop is almost entirely attributable to a one off transaction in the previous period. Underlying earnings grew by 21%. Operating profit was flat, reflecting ongoing investment in the business.

Management acknowledged a potentially declining Australian property market but issued a positive revenue outlook based on REA’s Asian expansion and push into related businesses. The report comes at a crucial point for the share price as it approaches support around $70.

However none of these positives will help today. The global downdraft in stock markets and its disproportionate impact on higher PE stock mean REA is likely to suffer in trading regardless of the quality of its results. Shareholders may console themselves with a 47 cent interim dividend, up from 40 cents previously.


Rio Tinto showers shareholders – by Michael McCarthy

Rio Tinto declared an $8.3 billion full year profit overnight (f/c $8.6 billion). This makes Rio the most profitable mining company in the world at the moment. The cost cutting of previous years is delivering operating margins of 60% - astonishing in a large cap but expected at this sweet spot of the mining cycle.

Shareholders will receive their highest ever dividend at AUD $2.2853 per share. Although the company expects rising wages and is increasing capital expenditure the strength of the cash flow means Rio will add US$1 billion to its buyback program, making the 2018 total US$1.9 billion. Unfortunately for Australian shareholders the buyback will focus on the London listing, which generally trades at a discount to the Australian listing.

London shares traded around 1% higher, but the US ADR (tied to the Australian listing) fell close to 2%. This performance, combined with a share price trading close to 7 year highs, may see Rio shares under pressure despite the stronger result.


NAB - not much too excite the market - by Ric Spooner

NAB has unveiled a steady quarterly report including progress as expected on the early stages of its $1.5bn expenditure on business automation and cost savings plans.

Unaudited cash earnings for the December quarter were up 3.5% on the same period last year but down 1% on the September 2017 quarter.

Revenue growth was only 1% and remains hard to come by for the banks. However, NAB reported good gains in its strongest segments of Business & Private and Corporate and Institutional banking. As expected, expenses were up 4% due to higher investment spend on productivity. Net interest margin was only stable whereas CBA reported a 6bp increase for the December half.

NAB’s result also benefitted from a 23% decline in bad and doubtful debt charges

Overall, this looks to be a steady but uninspiring result in a difficult environment for the banking sector.  

The NAB chart is approaching the 61.8% Fibonacci retracement level which coincides with a harmonic AB = CD level at around $27.70/$27.90. Any signs of the share price forming a base in this region could set up for a recovery following the recent sell-off

CBA unveils a solid profit result - by Ric Spooner

In most respects, CBA’s result was close to expectations. The engine room of its earnings, the net interest margin improved 6bp to 2.16%. Loan impairment expenses also fell 0.5% to $596m. While revenue growth remains subdued, a healthy labour market and improving business environment are keeping problem loans at low levels.

At a headline level, CBA’s cash earnings missed expectations. This is mainly because the bank made provisions for regulatory costs. It provided $375m for a civil penalty on the Austrac money laundering issue and $200m for extra regulatory costs including participation in the Royal Commission. Adding these back on, the overall cash result was close to expectations.

The market is likely to look upon these regulatory provisions as one off costs. It is very difficult to know what penalties the courts will impose for the Austrac breaches. However, CBA’s provisions are based on research and legal advice and are far less than some of the most pessimistic expectations.

This result should be good enough to allow CBA’s share price to recover on what promises to be a strong opening for the market.

 It will be recovering neatly off the 61.8% retracement level and a harmonic AB=CD chart level.


Carsales.com wins international  – by Michael McCarthy

Carsales.com’s solid revenue (+12%) and earnings (+9%) growth for the first half of its year came in slightly below market expectations. Nevertheless the result shows increasing traction in its international operations, a significant plus in a traditionally high risk endeavour for Australian companies.

Management re-iterated guidance, assuming a stable environment. A surge in private car sellers (+20%) drove the increases, although a 7% increase in dealer business is supportive. The company declared an interim dividend of 20.5 cents per share, up from 18.7 c previously.


Earnings First Take

This week the CMC Markets team kick off a close up look at Australian corporate results. Companies and anticipated results that have the potential to move share prices and the broader market are in the spotlight.

CMC’s Chief Market Analyst, Ric Spooner and Chief Market Strategist, Michael McCarthy will provide fast and focused commentary on selected results as they occur. All earnings seasons are important, but the positioning of the Australian share market at post GFC highs (chart above) means reports in total will likely set the direction for much of 2018.

Favourite or bookmark this page for a first take on important results. And keep an eye on @ricspooner_CMC and @MicMcCarthy_CMC on twitter for alerts. Whether it’s growth in miners’ earnings or the impact of higher interest rates on share prices investors and traders can find potential market responses to stock news here. Further detail, in depth Morningstar stock analysis and news alerts are available on our stockbroking platforms.

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