Investors hit jackpot as companies ride turnaround
Financial heavyweights, utilities and Telstra have delivered record shareholder returns as earnings rebound
Mentioned: AGL Energy Ltd (AGL), AMP Ltd (AMP), Commonwealth Bank of Australia (CBA), Challenger Ltd (CGF), Insurance Australia Group Ltd (IAG), National Australia Bank Ltd (NAB), QBE Insurance Group Ltd (QBE), Suncorp Group Ltd (SUN), Transurban Group (TCL), Telstra Group Ltd (TLS)
This earnings season may go some way in soothing the economic pain suffered by ASX investors last year. So far, it’s been all about rewards for shareholders—dividends, share buybacks and stock prices hitting record highs.
As results during the previous week indicated, the front half of 2021 has proved to be strong for corporate Australia.
The second week has been dominated by financial heavyweights, utilities and the major telecoms player—companies that bore the weight of the pandemic last year. Fittingly, they are now the ones underpinning the recovery.
The tone was set early by Suncorp Group (ASX: SUN) posting a 42 per cent jump in cash earnings, after its insurance business delivered the strongest growth since 2013. The increased dividend and an on-market share buyback of up to $250 million helped fire up its shares nearly 8 per cent.
“Rebound is the best word to describe Suncorp’s fiscal 2021 result,” Morningstar equity analyst Nathan Zaia said of the company, but he may well have been speaking of the entire financials sector.
Australia’s biggest lender Commonwealth Bank (ASX: CBA) reported a better-than-expected 19.8 per cent rise in full year cash profit to $8.65 billion. It also delivered a hefty $2 a share in final dividend and unveiled a record share buyback worth $6 billion.
“A key driver of the profit growth was low loan impairment expenses, down 78% after large provisions were taken last year,” Zaia said. The bank’s strong loan growth of 7% in home loans and 11% in business loans prompted him to lift CBA’s fair value estimate by 8% to $83 per share. CBA shares soared to an all-time high of $109.03 this week.
“With other banks trading around fair value or below, Commonwealth Bank’s 30% premium suggests the market is overpaying for the bank’s strong balance sheet and growth opportunities ,” he added.
National Australia Bank
Smaller rival National Australia Bank (ASX:NAB) also outlined its optimistic outlook, delivering a 10 per cent jump in June quarter cash profit to $1.7 billion, thanks to a $112 million write-back in provisions due to improved asset quality in housing and business lending.
NAB this week strengthened its market position through the $1.2 billion acquisition of Citigroup’s Australian consumer business and last month outlined its own $2.5 billion share buyback.
Returns to shareholders was the theme for another company that dominates its sector. Telecoms major Telstra (ASX:TLS) announced a $1.35 billion share buyback after the recent stake sale of its telecom towers business, and declared a fully-franked final dividend of 8 cents a share, including a special dividend of 3 cents.
That came on the back of a modest increase in full-year net profit to $1.9 billion and stronger earnings before interest, taxation, depreciation and amortisation (EBITDA) in the second half of the year.
“The quality of the result was encouraging,” Morningstar director of equity research Brian Han said, after upgrading the telco’s fair value estimate for the first time in six years, up 5% to $4 a share.
“The earnings and cash flow progress adds to Telstra’s investment case, already buoyed by the asset separation and monetisation program,” he said.
The outlook wasn’t as encouraging for AGL Energy (ASX:AGL). Australia's largest energy retailer and generator slumped to a $2.1 billion full-year net loss due to considerable asset writedowns related to legacy wind farm contracts as well as falling wholesale power prices.
AGL warned of a further financial hit, saying its underlying profit for the current financial year will nearly halve. That prompted a further decline in the stock to below $8. It has now lost over half its value in the past 12 months.
Senior equity analyst Adrian Atkins, who has a fair value estimate of $14 a share, says the AGL stock is materially undervalued on a long-term view.
“We think underlying conditions are starting to improve, which should lead to a medium-term earnings recovery… electricity prices rose sharply in the past few months and, while they will fluctuate widely, we think high gas and coal prices will keep them trending up,” he said.
Atkins was similarly sanguine about another market leader that is facing a bout of negative news.
Toll road operator Transurban Group (ASX:TCL) posted a 9% slide in full year revenue and, excluding one-off gains, an annual loss of $256 million as COVID-related lockdowns in Australia’s three biggest cities of Sydney, Melbourne and Brisbane weighed on its finances.
The company is also facing a $3.3 billion blowout on Victoria’s West Gate Tunnel project which threatens to hurt its credit rating and reputation for completing projects on time.
“The lockdowns are expected to be transitory and we expect double-digit growth in proportional EBITDA to fiscal 2025 on a rebound in traffic volumes, toll-price increases, and completion of new roads,” Atkins said, adding that his long term forecasts remain unchanged.
Among other major financial sector results, investment manager Challenger (ASX:CGF) swung back to a $592 million profit as revenue more than doubled due to a surge in life insurance and annuity sales. Underlying profit still fell 19 per cent as the company took a more cautious approach during the pandemic, including holding higher levels of cash that resulted in lower returns.
Equity analyst Shaun Ler adjusted his fair value estimate slightly higher to $7.60 per share.
“Challenger overall is in good shape: Annuity sales were at record levels thanks to a broadening of sales. Higher investment yields are likely, with the full benefits of reinvesting cash into high-yield fixed interest likely to materialise in fiscal 2022,” he said.
AMP, IAG and QBE
Beleaguered wealth manager AMP Ltd (ASX: AMP) lifted first-half profits 57 per cent on the back of higher investment income and the release of credit provisions, but stopped short of declaring an interim dividend as net outflows continued to plague its AMP Capital and wealth divisions.
IAG reported a $427 million net loss, with the result affected by a number of one-off items including provisions for business interruption claims, refunds for overcharged customers and remediation for underpaid staff.
On the other hand, QBE bounced back to profitability, delivering a $441 million first half gain thanks to high premiums, the release of reserves and new business, helping it declare a stronger interim dividend of 11 cents per share.
Persistent increases in large natural hazard events and claims inflation continue to weigh on the sector.
“Ultimately, with insurers all facing the same (cost) pressures, we expect this to be passed onto policyholders,” equity analyst Nathan Zaia said.
Next week will be the busiest of this earnings season. Major companies we'll be watching include:
- PEXA Group (ASX: PXA)
- JB Hi-Fi (ASX: JBH)
- BHP (ASX: BHP)
- Woodside (ASX: WPH)
- CSL (ASX: CSL)
- Coles (ASX: COL)
- LendLease (ASX: LLC)
- Seven West Media (ASX: SWM)
- Dexus (ASX: DXS)
- Santos (ASX: STO)
- Treasury Wine (ASX: TWE)
- Santos (ASX: STO)
- Westpac (ASX: WBC)
- ANZ (ASX: ANZ)
- Dominos (ASX: DMP)
- Newcrest (ASX: NCM)
- Origin (ASX: ORG)
- Cochlear (ASX: COH)