Earnings season winners and losers

Christine St Anne  |  15/02/2013Text size  Decrease  Increase  |  
Christine St Anne: Earnings season continues this week with a number of companies including Wesfarmers, CBA and Rio announcing their results. Morningstar's Peter Warnes joins us again to give us his take on the companies that impressed him and those that did not. Peter, welcome.

Peter Warnes: Thanks Christine. It's lovely to be here.

St Anne: Peter, let's start with the banks. Did CBA's cracker result surprise you? And where there any concerns from ANZ's trading update?

Warnes: Christine, CBA's result was a great result. It ticked all the boxes, and if there was any surprise, I guess from a headline point of view, a 20 per cent increase in the interim dividend to $1.64 probably surprised people, but the Bank had already indicated that it's going to rebalance the first half, second half dividend and so let's not expect a 20 per cent hike in the second half, it won't happen. They've already guided that the second half dividend will be slightly lower than second half of 2012, but overall, we are looking for almost a 10 per cent increase in the dividend for the full year. So that was surprise number one at the head line.

Surprise number two, the 81 per cent of their mortgage customers are now on average seven months in advance of their payment requirements. That is a staggering number. It will put some shivers into the spines of bears that the Australian housing market is going to collapse and there will be a calamity in bad debts for the major banks. So Commonwealth Bank's result, honestly, it was very, very hard to fault and the market appreciated the results accordingly. In terms of ANZ, again, no negatives there. Surprises were that the bad debts were a little lower than anticipated, so that's a positive. Margins are holding at the levels of last year, about the 2.25 per cent to the 2.26 per cent mark. Overall the bank looks to me to be in line for another strong result this year.

St Anne: Moving on to mining giant, Rio. Peter, was their result what you expected and are there any immediate concerns for the newly appointed Chief, Sam Walsh?

Warnes: Rio, a few weeks ago delivered some bad news for the market in terms of some significant impairment and write-downs, and the market did pull back their forecast. So Rio did actually match expectations and as I said, only just recently downgraded. So there were no surprises there in the, underlying bottom-line which was down 40 per cent, iron ore again the feature, and a very strong result there despite weakening iron ore prices.

The dividend was a surprise, and perhaps it was a little bit of giving the shareholders back something after some bad news. So that was positive. Now Sam Walsh has – there's lot of expectation, and the weight of Rio is on his shoulders so to speak. He has got a pretty stamp on this multinational mining group, I think fairly quickly. He is already set right, slashing operating costs, cutting capex, reducing exploration expenditure. So he is going to drive the bottom-line. By driving the bottom-line, hopefully there will be some more goodies to shareholders down the track. Has he got any problems? I suspect the problems might be more to do with sovereign risk than operational. He's got Mongolia, Guinea, and Mozambique to deal with. Three places quite frankly I wouldn't want to do any business. But he has operations there of size and he will have to deal with those sovereign risk issues, whilst as I said, focusing on the bottom-line and driving it.

St Anne
: What about Wesfarmers. We know Coles did very well, but how did their other businesses stack up?

Warnes: Christine, Coles did do well, and just covering off that briefly, strong performance up 14.6 per cent in EBIT, off a 5 per cent increase in sales, EBIT margin up 38 basis points to 470. Things are going well there. In terms of the other operations, Bunnings was another feature; I mean you've got a very, very competitive market. You've got Masters muscling in, you've got a rejuvenated Mitre 10 and yet, they held the margin, in fact in margin they jumped to 12.9 per cent. So EBIT up 6.5 per cent, 6.8 per cent on sales of that 5.8 per cent, a great performance in that competitive environment with deflation still even. Kmart was outstanding, I just don't know how they are doing what they are doing, but Guy Russo has got it absolutely firing. Margins of 10.7 per cent in the discount department store are heard off in Australia and he is doing a wonderful job there.

Target on the other hand didn't disappoint because you've got a massive restructuring operation and a repositioning if you like, of Target in the market between the department store and the discount department stores, they are trying to slot it in a little bit above the discount department store. EBIT down 20 per cent, sales just up a tad, look, they'll get that right, so no real problems there. The Resources clearly was a downtick but look, that's a volatile situation, earnings down 63 per cent, it will turn around, but they've got some work to do, I mean, despite the production being up, significant force in coal prices. In addition to that, clearly operating costs went significantly higher and they’ve got to start addressing those issues. Industrial and Safety was a little bit disappointing albeit that it is facing, one of their clients the major miners, so they are selling consumables to the major mining companies. So that was off a little bit because of the reduced activity in the mining space. Chemicals, Energy, and Fertilizers were a flat result and kind of as expected. Insurance was a very strong result but rebounding from this, a very elevated client in the previous corresponding period at Christchurch and a few weeks caused problems.

St Anne: Peter, the Australian REIT sector has reduced its risk over the past few years. With the announcements this week from GPT, Stockland and Dexus, have their results reflected this trend?

Warnes: Christine, the markets perceive that there's less risk in the REITs now and to a great degree they are correct, because the biggest risk in REITs is gearing. After the GFC, the gearing has been repaid and the majority of REITs now have a very, very comfortable gearing ratio. So in terms of risks, the balance sheet is in much better shape. In terms of the portfolios if you like, the diversified REITs, anyone exposed to residential has still got some higher risk. You've seen that with significant write-downs in Mirvac and Stockland. So the risk is probably, yes, it's abated because of lower gearing, but we must be aware that those exposed to residential have still got some risk.

In terms of the results GPT was in line with where we looked and we're looking forward to another wood solid second half. Dexus, again in line with expectations and no problems there. Stockland, again, they followed Mirvac with a significant write-down on the residential side, but their other exposures office and in commercial are pretty reasonable. Look, in terms of REITs going forward, we're still fairly relaxed. Occupancy is high in terms of retail office and industrial. So, we're comfortable in terms of that position. Residential has still got – we're still relatively nervous on residential, but overall not too bad.

St Anne
: Peter, thanks again for your insights.

Warnes: It's lovely. Thank you, Christine.

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