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WEEKEND LADDER

A summary of the week’s results

23.02.2018

Week Ending 23.02.2018

Eco Blog

- A glimmer of wage growth in Australia is not yet likely to change consumer behaviour or impact the RBA’s decisions. As elsewhere, a meaningful rise in pay rates is expected to be hard to achieve.

- The US inflation story marches forward. Activity levels are accelerating into an already robust level. The inflation storyline will be the critical chapter with structural features potentially to add to the cyclical pressure.

- European growth has maintained its pace into this year. With Germany at a near maximum output capacity, it is pushing some of that workload to other European countries, thereby broadening and improving the cycle.

There was much excitement about a little number this week; wage growth in Australia picked up from 2.1% to 2.2%. Yet, it appears certain that the long downward trend in wages has come to an end. Public sector wages are moving ahead of the private sector, led by Victoria and to a lesser extent Queensland (both perhaps unsurprisingly Labour states with forthcoming elections). This is also evident in the job categories, with health, services and education all above average.

Wage growth, private and public sector          By job category

Source: ABS, ANZ Research
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The NAB Business Survey did report that private business was finding it harder to employ suitable employees (a global refrain), but that an incapacity to pass on costs would prevent them from paying up for labour.

There is also likely to be an interesting evolution in jobs, as the likes of the banks reduce staff, in contrast to the type of category where the growth is evident. Further, aside from state-based infrastructure, it is probable companies will invest in lower cost (i.e. labour reducing systems) to compete.  As previously noted, the labour supply side has partly responded to demand, with the participation rate picking up. In summary, this points to a likely slow and low lift in wage levels, with the RBA expected to wait until income levels could cope with a rate hike without risking consumption spending.

  • Australian companies will have to rely on self-help to achieve profit growth as the economy has only modest impetus to contribute.

Evidence that the US economy is heating up is becoming the norm. The inevitable focus will remain on how that translates into inflation. The PMI survey released this week shows that price pressure is mounting. While it has been on a similar path before, this time the momentum is coming into an economy operating at near full capacity and when inflation expectations are low.

The chart on the left also implies that corporates are lagging in terms of passing on costs, with operating profit margins likely to see some pressure. The PCE (private consumption expenditure) trend (right chart) is the proxy for consumer prices that is more broadly based than the CPI and referenced by the Fed as an indicator of price pressure. It includes a much higher weight to services while housing and goods are lower in the measure. The appropriate method of including housing costs in an inflation measure is a matter of much debate in the various country statistical bureaus. Imputed rent is often used to assume a cost an owner has a cost equivalent to rent. Utilities, rates and other such service costs are separate to that.

US PMI survey price gauges                                       US price pressures

Source: HIS Markit
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It is not only the cyclical factors that are pointing to higher inflation but also structural influences. The most obvious is the fall in the USD rate that will incrementally find it way into import costs. Similarly, the rise in the oil price is a combination of global growth and demand supply within the industry, rather than directly a function of US GDP.

Healthcare costs rose in the CPI in January and, given the high weight, both the CPI and PCE is likely to be a contributor to rising inflation that is not linked to economic growth.

Healthcare price index

Source: Haver, BAE, Deutsche bank
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In March, the data will cycle the impact of the 13% decline in communication charges caused by unlimited data plans. While this is well known, the headline impact will be another pressure point on inflation expectations.

Higher US bond yields are already having some impact on household behaviour, with mortgage rates on the rise. US mortgages are typically linked to long term bonds.

Effective Interest Rate (%)

Source: Mortgage Bankers Association/Haver Analytics
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Existing home sales have followed the buck and trended downward by 5% in January after a modest 2% rise in 2017. The median sale price of existing homes is a mere $240 000, somewhat of contrast to Australia.

  • One of the risks to equities is that profit margins in some sectors are tighter than expected if cost pressure cannot be passed on. Further, the household sector is sensitive to rates, even if the movements are small; arguably a legacy of the 2008/9 period.

European activity levelled off into February but remains at an elevated pace and broadly spread across services and manufacturing. The combination of the rise in the Euro and capacity constraints in Germany are starting to take their toll. Anecdotal evidence is suggesting many German companies are moving some of their production to other European countries to cope with the local wage rises. The case for retaining manufacturing within the Eurozone is high. It removes exchange rate risk, the regulatory issues are generally the same, senior management can oversee these operations with relative ease and there is no risk in tariffs. 

From a country perspective, it is Italy that could gain the most. Subject to the usual outcome on the March 4 election, that is, a noisy but benign coalition government, the early signs of economic recovery in Italy could lift it to carry more of the positive thrust of the region.

  • European equities have not recovered from the pullback earlier in the year. While they also don’t have the tax relief, the earnings cycle could yet surprise.

Fixed Income Update

- 10-year Treasuries approach a 3% yield. The likely path of yields beyond that is subject to much debate among bond market participants.

- The US Treasury undertakes record new issuance over the week to fund tax reforms and fiscal spending.

- The spread differential between Spain and German government bonds converge as demand for securities from peripheral European countries is on the rise.

The US 10-year treasury yield is just under 3% after beginning the year at 2.43%. The direction of rates from here is met with varied opinions. A lift in inflation is likely to see markets initially pushing the yield higher, with the expectation that the Federal Reserve will need to raise interest rates more aggressively. But will higher yields hold? Some are of the view that despite real yields (inflation adjusted) loitering around 0.80%, they remain below September 2013’s peak of 0.92% when the Fed marked the end of Quantitative Easing (taper tantrum) and have not broken out of this longstanding trading range. A few large global long duration bond funds are talking about adding duration into portfolios should the yield rise above 3%. They are of the view that the market will have over-run and rates will ease back. Technical analysts talk to a build-up of ‘interest rate puts’ at a yield of 2.95% and 3.10%. As yields approach these levels, traders who have sold these ‘puts’ are likely to hedge their positions by buying 10-year treasury futures and creating a level of support.

10-year treasuries and the level implied by a model

Source: Gavekal Data/Macrobond
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While the above may hold true, there are other unprecedented factors determining the likely pathway of yields which have investors wary. By way of example, the physical funding of increased fiscal spending and tax reforms in the US began this week as the Treasury increased its issuance of bonds through several auctions. The additional supply originally focused on short dated notes, with maturities out to six months marking a record week for issuance. Auctions took place early in the week for $55bn 1-month T-bills, $51bn 3-month T-bills and $45bn of 6-month paper. Longer dated tenors (5 and 7 years) followed later. The increased supply from the auctions has been one of the drivers for a push higher in yields over the week, with the reduction of the Fed’s balance sheet adding to the supply side.  Demand from investors is said to have been mixed.

Banks have also felt the brunt of higher funding costs as the spread (premium above the risk-free rate) on bank debt has also risen.

In another consequence of the US tax reforms, one of the contributors is the liquidation of securities by multi-national companies as they repatriate capital back to the US. US companies with offshore subsidiaries were large holders of 1-3-year bank bonds. Realisation of these holdings is blamed for weakness in short dated corporate bonds over the last two weeks.

  • For many reasons, including the above-mentioned supply dynamics, we still recommend a tactical underweight to fixed income, in particular, fixed rate products (duration). We await yields to push higher, pricing in the likely path of interest rates, the increased supply and falling demand, and inflationary expectations

In Europe, increased support for debt issued by periphery countries (e.g. Italy and Spain) has resulted in a contraction in the spread differential between yields on German and Spanish bonds. Following an upgrade by rating agency Fitch, Spain issued its first 30-year bond in two years. The order book was said to be well over-subscribed with €25 billion chasing a €6 billion issue size. Prior to Spain, Italy had set the recent record for the biggest size of an order book on its debt sales. Many of the buyers (estimated at approx. 20%) are said to be from German pension and savings funds looking for a little extra yield outside Germany. It also is an indication of the improved financial conditions and synchronised recovery across Europe.

Spanish and German 5-year government bonds

Source: Bloomberg, Escala Partners
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Corporate Comments

- Cost pressures impaired the result of Brambles (BXB), leading to an uncertain near-term outlook.

- BHP Billiton’s (BHP) half year result also fell short of expectations on costs, however there should be upcoming positive catalysts in the next six months.

- Oil Search (OSH) announced further progress on its LNG expansion plans.

- Better conditions materialised in various earnings announcements from mining services companies, including Seven Group (SVW), Downer EDI (DOW), Monadelphous (MND) and WorleyParsons (WOR)

- Coca-Cola Amatil (CCL) reported well considering the headwinds it faces, while its dividend has appeal.

- Investors were concerned with a rise in capex for Sydney Airport (SYD), however the company is again expected to report solid distribution growth in 2018.

- Flight Centre (FLT) has put several downgrades behind it with an improved result amid a more stable operating environment.

- Lendlease’s (LLC) earnings beat was of low quality and there is the potential for more losses to be realised in its engineering construction division.

- Crown Resorts (CWN) is an asset restructuring story, although the performance of its domestic casino assets are lagging that of Star Entertainment (SGR).

- Qube (QUB) reported well amid a competitive operating environment. Execution at its Moorebank intermodal facility is key to its future success.

- Both Wesfarmers (WES) and Woolworths (WOW) reported respectable results but were sold off due to a weak profit outlook. The relatively high P/E are offset by decent yields and an apparently benign competitive outlook.

Cost pressures have been a notable issue of this reporting season across various sectors of the market, from broad industrials stocks to mining companies. This was the case with pallet pool operator Brambles (BXB), with 5% top line growth translating to a marginal 1% increase in earnings (at constant currency FX) and an unchanged dividend.

The group’s core US pallets business was again the key disappointment, which had previously been behind an earnings downgrade early last year. While volume and new business wins in this division have improved since then, an escalation in costs has hurt margins. Transportation costs represent the largest expense line, but lumber prices are also significant. Contributing to a challenging environment for the second half is the fact that the cost inflation run-rate had accelerated into 2018.

Brambles: Cost Inflation

Source: Brambles
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With little cost escalation built into its contracts, there may be some time before BXB is able to pass this on to its customers. Confirming this view is a lack of earnings guidance from the company, instead noting that it expects to show profit growth in excess of sales growth “through the cycle”. With the stock is now trading back to a multiple that is in line with the industrials market, this balance now appears to be reflected in the share price.

Cost inflation was also the focus of BHP Billiton’s half year earnings report, with underlying earnings growth of 25% falling short of expectations. While some investors were disappointed on a lack of action on the capital management front, the company remained consistent with its intention to increase shareholder returns by lifting its half year dividend by 38%; a healthy increase to above its stated minimum 50% payout range. The capex budget is expected to edge up this year, however the changing balance between investment and dividends has now been in place for some time and has been more visible following the recent increase in cashflows.

BHP Billiton: Capital Allocation

Source: BHP Billiton
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The increase in unit costs was perhaps unsurprising following the trends realised in peer Rio Tinto’s recent result. Two years into the recovery in commodity prices, the sector has restored its margins towards similar levels seen at the peak of the cycle. Many miners are now catching up on capex (particularly ‘maintenance’ capex, some of which was deferred when cashflows were weak). Additionally, a higher $A is now also being factored into forecasts, which is the base currency for much of BHP’s cost base and while this is more than offset by stronger commodity prices, it nonetheless is a drag on its margins.

It would be fair to surmise that the market now has less confidence in the miners to deliver on cost and productivity targets, although over time increasing levels of automation will continue to be an opportunity (potentially giving the larger miners an advantage). Despite the challenges, the near-term outlook remains quite favourable on robust demand and commodities pricing.

Additionally, for BHP there is a catalyst in the divestment of its US shale energy assets (further news is likely in coming months), with the timing fortunate given the rebound in the oil price. A successful exit should see shareholder returns ramped up in FY19 and help to improve the group’s return on capital employed across the business.

The key piece of news in Oil Search’s (OSH) full year report was the progress being made on the PNG LNG project. Importantly for the economics of the proposed expansion, there is now broad alignment between the key parties on the preferred development concept, which would be a three-train expansion (effectively more than doubling the existing nameplate capacity). Two of the trains will be supported by the Elk-Antelope gas field (this announcement was anticipated after PNG LNG operator Exxon Mobil bought into the field following its acquisition of InterOil in mid-2016) and the third train from the existing resource base.

While the proposed project is still some years away from reaching a production phase, as with the original PNG LNG project, it would again result in a step change in the production profile of OSH. The current expected timeline from here is for design work to commence in the second half of 2018 and an investment decision sometime late next year following discussions with the PNG Government and successful marketing of the additional volumes. As illustrated, the expansion compares quite favourably to other proposed LNG projects around the world that meet rising demand over the next decade.

Proposed LNG Projects: Breakeven Prices

Source: Oil Search, Wood Mackenzie
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OSH also noted that, at this stage, it will not require additional equity funding for the project, although this obviously leans on supportive oil and LNG prices. While this may limit its dividend growth, this has not been the priority for investors who are more attracted to its sector-leading growth opportunities among energy stocks. We have OSH in our Escala equity portfolio.

The positive environment for the resources sector also translated to better earnings results from several mining and energy services stocks. including Downer EDI (DOW), Monadelphous (MND), WorleyParsons (WOR) and Seven Group Holdings (SVW). With capital expenditure budgets slashed for resources companies over the 2012-2015 period as commodity prices plunged, the sector was acutely affected through reduced revenues and tighter margins.

While there has recently been a lift in investment spend, the rise only appears significant as it is off a much lower base and does not reflect a return to the prior boom times. Nonetheless, the stocks within the sector have been among the best cyclical performers in the Australian market in the last two years (particularly compared with consumer-leveraged companies). Arguably they have run ahead of the actual recovery given the significant P/E expansion, with the companies effectively transitioning from ‘deep value’ to ‘expensive cyclicals’ in this time.

Seven Group’s (SVW) link to mining investment is less known compared to other stocks mentioned, although it has been the key driver of the stock’s performance through last year. While the company has a myriad of investments across diverse sectors, including media, property and energy, WesTrac and Coates Hire (which it increased to full ownership around five months ago) are the key assets that have been behind a lift in earnings, up 23% on an underlying basis.

WesTrac, the dealer for Caterpillar equipment in WA, NSW and north eastern China, is benefiting from the investment catch up, including on deferred maintenance work. Product sales rose by 36% in the half, while support revenue also grew by 10%. Meanwhile, Coates Hire also has been assisted by rising demand on the back of the east coast infrastructure work. SVW has been a positive contributor to Martin Currie’s performance over the last 12 months.

Last year we highlighted DOW as a diverse exposure to mining and infrastructure work in Australia. Some of these drivers were evident in its half year earnings (underlying EBITA adjusted for the inclusion of the Spotless acquisition) which rose by 15%, although somewhat surprising there was the drag from its mining division following the expiry of a contract it had with Fortescue Metals (FMG). Though the outlook is better for these two key areas, it has diluted the link to tailwinds following its acquisition of Spotless. Thus, its success in integrating this business and achieving its targeted synergies is likely to be as important for its medium term earnings profile.

Monadelphous has been one of the better managed large-cap listed services groups over the last decade. The company, however, has been closely linked to construction, as opposed to maintenance work, leaving it vulnerable in a downturn. For the half revenue growth was solid at 39%, although margins were slightly disappointing, with more optimistic projections dialled back. Helping MND through the recent trough in investment has been the extended work within the LNG space; construction activity in the December half was underpinned by the Ichthys project in Darwin. The group’s orderbook is expected to rotate towards mining projects in future periods and, while further recovery is expected and its strong balance sheet (in a net cash position) gives it some optionality, the consensus view is that the stock is a ‘sell’, trading on 23X forward earnings.

Alongside MND, WorleyParsons is typically viewed as the other quality name in the sector through its position among the global leaders in energy services, with little construction contract risk. WOR has done a reasonable job through the downturn in rightsizing its workforce, to the point that utilisation rates are now tracking back around its 85% target rate. WOR reported 7% revenue growth in the first half (although was supported by an acquisition made in October), while EBIT rose 13% on better cost performance. Additionally, after being suspended for over two years, WOR reinstated its dividend, giving an indication of management’s view on the outlook.

The recovery in the oil price has trailed that of most other commodities by around 18 months, which should translate into a lag in terms of investment by WOR’s key customers compared with its mining services peers. More recent newsflow has been encouraging on this front, although the current expectations among global energy companies is for a fairly modest recovery in the next few years. Companies are instead focusing on repairing balance sheets and shareholder returns leaving capex levels unlikely to return to anywhere close to 2013 levels; 2018 investment is expected to be around 40% below this benchmark year. The longer-term thesis for a rise in investment, however, is supported by the rate of depletion of existing oil fields which will need to eventually be replaced. Similar to MND, WOR now trades on a forward P/E of 22X.

Oil and Gas Majors: Global Capex YoY Growth

Source: FactSet, WorleyParsons
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Coca-Cola Amatil (CCL) had improving trends in the second half of its 2017 financial year, although has an uphill task given the structural headwinds it faces. Full year earnings were broadly in line with FY16 and consistent with the company’s guidance, while the final dividend was increased by 4%.

The primary challenge for the group is the ongoing declines in volume in fizzy drinks as consumer preferences move to healthier alternatives, a trend which has been established for some time. Within its core Australian beverages division, soft drink sales fell 3% over the year (although slightly less in the December half) leading to an EBIT decline of 6%. Soft drink accounts for two thirds (albeit diminishing) of Australian sales, and the residual business have to do much of the heavy lifting to achieve overall top line growth. The hurdles maybe higher again this year, with a potential drag on volumes created by the introduction of a container deposit scheme in NSW (CCL has increased its prices to recover its costs) and progressively other states over the next 12 months.

CCL is addressing this issue by accelerating reinvestment back into the business from savings it is achieving on its ‘cost optimisation’ program, which has identified opportunities across the supply chain, in procurement and in support services. The goal for the company is to restore revenue and earnings growth, with an additional investment from The Coca-Cola Company as a benefit. Success on this front is critical for the company’s outlook and help to overcome other threats, such as the potential introduction of a sugar tax. Additionally, this would help shore up the dividend. This remains the primary attractive feature of the stock leading to its place in many income portfolios, with a forward yield of 5.0%, albeit with limited expected growth and a prevailing high payout ratio.

Coca-Cola Amatil: Cost Out and Reinvestment Profile

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Sydney Airport’s (SYD) result was solid, with an 8% rise in EBITDA supporting the pre-announced 11% increase in distributions for the year. Growth in passenger numbers is the key variable that underpins each of its business lines, from aeronautical services to retail to parking. In 2017, passenger growth was 4%, with domestic again lagging as the airlines continue to exhibit better discipline around capacity additions and maximise yield. International passenger growth, however, remains robust and the outlook for 2018 is a continuation of this trend. This changing passenger mix is positive from a revenue point of view, given the higher retail spend of this group and associated aeronautical charges.

While its result was solid, SYD edged down, likely because of two factors. Firstly, its distribution guidance for 37.5c (which would represent growth of almost 9%) was marginally below expectations, although this may prove to initially be set conservatively. Further, SYD’s capex budget has increased again, with up to $1.5bn over the next four years. While this reinforces SYD’s confidence in the outlook for passenger growth, it was above the market’s expectations and will perhaps require to be recouped via further hikes in its next aeronautical fee agreement with the airlines.

As with other interest rate sensitive stocks, SYD has underperformed the broader market as investors have become more concerned with the implications of the end of easy global monetary policy conditions and, as such, we remain wary of this overriding driver outside of its control. The stock has become somewhat cheaper, with its EV/EBITDA multiple dropping to around 17X from a peak of 21X. In its favour is its high yield (5.9%) and growing distribution levels (which see it placed in the Martin Currie SMA), a wide gap between its yield and the benchmark Australian 10-year yield, and the likelihood that the Australian rate cycle is likely to lag much of the rest of the world.

SYD: Yield Premium to Australian 10 Year Government Bond

Source: Bloomberg, Escala Partners
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Meanwhile, Flight Centre (FLT) soared after a modest 2% lift in its full year guidance (its second upgrade in six months and projecting low double digit earnings growth), with the series of downgrades that had previously plagued the company now well in the rear view mirror. The result was driven by a further 7% increase (in constant currency terms) in total transaction value (TTV), with good contributions across its global network and the company lifted its dividend substantially.

Much of the company’s previous issues had been driven by airfare deflation rather than lost market share to online-only operators. With airfares stabilising and FLT beginning to address its cost base, the early signs of a turnaround have been quite promising. Strong cost control was a feature of the result, which helped to improve margins and the company is making progress on the rationalisation of its large family of brands. However, a notable key expense line that was reduced was sales and marketing costs, which may have implications for the group’s revenue trajectory if sustained.

While FLT’s earnings momentum has now turned a corner, the dual risks of airfare deflation and the rise of low cost carriers (which pay lower commissions and therefore reduce FLT’s margins) is likely to mean that a challenging environment could return in the future. In its favour is a strong balance sheet (with minimal debt and in a net cash position) and ongoing solid TTV growth. The share price that has doubled over the last 12 months and the stock has transitioned from good value to perhaps slightly overvalued, with it now on a premium to the industrials sector.

Lendlease’s (LLC) half year had a mix of good and bad news, balanced towards a better than expected result. Profit for the period was up 8%, with a marginal 3% uplift in its interim dividend. The company received a tick for a better operating cashflow result and, with gearing below the group’s targeted range, an on-market buyback of up to $500m was announced. Underpinning the  earnings was the increase in residential apartment completions (with settlement risk fears not being realised) and this is expected to remain buoyant into FY19.

Detracting from a more positive assessment was the quality of the earnings, with a large contribution from asset revaluation gains. Additionally, the company reported larger than expected losses from a few fixed price engineering projects, which was previously flagged last October, a lesson that the increase in east coast infrastructure spend is not a guarantee of profit growth for those exposed to the theme. These projects are yet to be completed and, taking into account the multiple downgrades that these issues have caused its peers in the past, there is a risk that LLC has under-provisioned.

LLC has been shifting its apartment development exposure towards international locations, which will help to support earnings as the peak of the construction cycle passes in its key Sydney and Melbourne markets, although Australia remains its primary region. We identified this as a potential headwind when we took the stock out of our model equity portfolio last year and the potential for further engineering construction losses could linger for some time yet.

Lendlease: Development Pipeline by Region ($bn)

Source: Lendlease
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Crown Resorts (CWN) reported softer trends than its peer Star Entertainment, although there were also some parallels. The group’s core domestic casinos had mixed results, with respectable growth in Melbourne offset by weakness in Perth. As with SGR, the driver for Melbourne was a recovery in high roller VIP activity, with a 38% increase in turnover. Despite the rise, high roller revenue remains well below the levels recorded in FY15/16, prior to the disruption (and reputational damage) that occurred following the arrest of several of its employees in China.

Lower corporate costs were another feature of the result, while two other P&L lines reflected the outcomes of CWN’s changing strategy. Net interest charges were reduced following the pay down of debt, made possible by asset sales, including its investment in Melco Resorts (Macau); hence there was zero contribution from Melco in this period. The investment thesis for SGR and CWN is thus currently quite different – SGR is an organic growth story with casinos in Australia’s most popular tourist destinations, while CWN is about asset restructuring (where progress continues) and increased shareholder returns, including a recently announced share buyback. We have the former in our model equity portfolio, while we note that Investors Mutual have established a position in CWN.

Logistics services group Qube (QUB) reported a reasonably solid first half, recording a 16% rise in underlying EBITDA. EPS, however, was lower, due to the capital raising completed mid last year in order to fund the development of its Mooreback intermodal terminal facility in Sydney. The result was delivered amid a positive trading environment from a volume perspective across most of its operations, from commodities to container volumes to vehicle imports. While top line growth was solid, earnings were held back by high levels of competition and pressure on rates.

Qube: 1H18 Underlying EBITDA

Source: Qube
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While QUB has more recently disappointed on the earnings front, its longer term growth continues to be tied to Moorebank and the expected gradual step up in earnings in coming years. An additional milestone was achieved, with the company announcing it had reached an in-principle agreement with a prospective tenant for around 20% of the facility’s warehouse space. Further such announcements through the next 12 months are likely to shift the focus to this opportunity and less so on what it a high current forward P/E multiple.

Wesfarmers’s (WES) result provided a small breath of air for shareholders that have worn a sequential set of negative outcomes. The stalwart Bunnings business continued to deliver sales and profit growth in the high single digit, recently boosted by the demise of Masters. The only negative questions that are worthy of debate are the continued legacy effect of becoming the sole category killer in this sector and whether a softening housing market takes some of the gloss off the pattern. High expectations must be met given the achievements to date.

Bunnings ANZ store sales growth

Source: Wesfarmers, Deutsche bank
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The stabilisation in Coles margins was the centre of attention. While sales growth on a same stores basis is very low, the margin is no longer declining and the heavy investment in repricing its product range appears to have run its course.  The outlook is set on low single digit growth for Coles and WES overall. At 17X forward earnings, the stock is expensive given the low growth, but the 5% franked dividend sees it represented in income and defensive portfolios.

Woolworths (WOW) followed with its statement at the end of the week. A 4% sales lift in the supermarkets and 26bp rise in margin gave the Australian food division a relatively healthy 11% EBIT lift. The outlook statement noted that the recovery cycle had largely run its course and sales growth could be expected to moderate.

The other divisions were less compelling. New Zealand supermarket profit fell under margin pressure, the alcohol retail division eked out a 2% EBIT growth while hotel profit (gaming) was up strongly. This is an increasing focus in portfolios with a social impact overlay. The best that could be said about Big W was that it was less bad, with a loss of $10m in the half against $27m in the previous corresponding period.

Similarly to WES, the profit expectations for Woolworths are now mid-single digit and rely on the yield for valuation support.

For an income-oriented lower risk portfolio, a holding in these stocks achieves its goal, though the risks are skewed to the downside in the longer term as consumption habits change.

Results season wraps up next week, with a smattering of companies left to report:

Monday: BlueScope Steel (BSL), QBE Insurance (QBE), Chorus (CNU), Spark Infrastructure (SKI), G8 Education (GEM), Arden Leisure (AAD), Reliance Worldwide (RWC)

Tuesday: Lynas Corporation (LYC), Iluka Resources (ILU), Costa Group (CGC), Caltex (CTX)

Wednesday: Adelaide Brighton (ABC), Macquarie Atlas (MQA), Ramsay Healthcare (RHC), Harvey Norman (HVN), Bega Cheese (BGA), Trade Me Group (TME)

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