Reporting season wrap
02 Oct 2015
By Shadforth Financial Group
The company reporting season has finished for another year, with FY15 results generally in-line with market expectations. The S&P/ASX 200 index underperformed international equities during August, ending the month 7.8 per cent lower.
The average dividend payout ratio increased slightly during the financial year. This was mainly due to an increase in the resource sector, with resource companies maintaining or increasing dividends despite significantly lower earnings. The dividend yield for the resource sector is currently above the market average, the first time this has occurred in over a decade.
Debt levels remain below long-term averages, meaning companies have the balance sheet capacity to fund growth. The average gearing level was 41 per cent at the end of FY15, five percentage points below the long-term average.
Companies continue to focus on taking costs out of their businesses to improve margins. The major resource companies and a number of cyclical industrial companies led the 'cost out' theme.
Earnings for the resource sector were generally in-line with market expectations, however forecasts were reduced significantly during the year as the price for iron ore, coal and oil continued to fall.
Guidance for FY16 was generally below market expectations, with companies battling slowing revenue growth and increasing cost pressures.
The major banks' stocks came under selling pressure due to the race to strengthen balance sheets, with ANZ and Commonwealth Bank announcing capital raisings. Australian banks have raised a combined $16 billion this year to meet increased capital requirements from regulators, surpassing the $13 billion raised during the Global Financial Crisis.
The short-term effect of the banks maintaining higher capital levels will be modestly lower returns on equity, and lower growth in earnings per share and dividends. However, we believe the major banks are in a strong position to cope with the higher capital impost. Importantly, higher capital requirements will strengthen balance sheets and underpin more sustainable long-term profit and dividend growth.
Commonwealth Bank (CBA) reported a 5 per cent increase in cash net profit after tax (NPAT) to $9.14 billion for FY15, slightly above market expectations. Australia's largest bank continues to leverage strong competitive advantages to generate good growth in profits and dividends despite challenging economic conditions. The $5 billion capital raising will strengthen the company's balance sheet to global peer-leading levels.
Wesfarmers (WES) reported an 8.3 per cent increase in NPAT to $2.44bn for FY15, broadly in line with market expectations. The company delivered strong sales growth within its retail businesses, due to improved merchandise offers and the delivery of better value to customers.
Coles Food & Liquor delivered like-for-like (LFL) sales growth of 3.7 per cent during the 2H15, which was an impressive result in the highly competitive grocery market. The 'Coles Fresh' campaign is resonating well with customers, with fresh produce sales up double-digits. Bunnings delivered an 11.1 per cent increase in earnings before interest and tax (EBIT) to $1.09 billion. LFL sales growth was 8.8 per cent for the year. Management is seeing pleasing growth across all categories and will continue to reinvest into the store network. Management commented that trading for the first seven weeks of FY16 has been similar to the 4th quarter of 2015, with good momentum in Coles, Bunnings, Kmart, Officeworks and Target.
Woolworths (WOW) reported an underlying NPAT of $2.45 billion, which was flat on the prior year and in-line market expectations. Statutory NPAT declined 12.5 per cent to $2.15 billion due to one-off restructuring charges. Due to ongoing pressure following the recent underperformance, Chairman Ralph Waters resigned and will be replaced by Gordon Cairns. With a new chairman in place, the process of finding a new CEO is likely to be expedited.
Woolworths' Australian Food & Liquor LFL sales growth fell steadily throughout the year, from 2.1 per cent in the first quarter to a decline of 0.9 per cent in the fourth quarter. Considering this includes the strong Liquor division, the result is disappointing and well below the growth achieved by Coles. Management commented that Woolworths now claim to be at least matching Coles in store retail prices and cheaper in the online segment. The Masters business continues to generate losses, with the new CEO having a difficult task of trying to turn around the business or potentially exit it. Woolworths will not provide profit guidance going forward, however the company does expect margins to compress further.
Global mining giant Rio Tinto (RIO) reported a 43 per cent fall in first-half 2015 underlying earnings to US$2.9 billion, exceeding market expectations by around 20 per cent. Underlying earnings per share for the half year fell 43 per cent to US159.1 cents. The company maintained its policy of paying out progressively higher dividends, increasing the interim dividend by 12 per cent to US$1.075 per share. Due to the weakening Australian dollar, this equates to a 40 per cent increase in local currency terms.
Cash costs for Pilbara iron ore continue to fall, providing the company with a significant advantage versus high cost producers in the current low commodity price environment. Cash costs of US$16.20 per tonne for the first half were 21 per cent lower than the US$20.40 achieved in the previous corresponding period.
BHP Billiton (BHP) reported an underlying profit from continuing operations (ex-South32) of US$6.4 billion for FY15, down 51 per cent on the previous year. Headline earnings of US$1.9 billion included the previously announced US$2 billion impairment on its US onshore petroleum assets, a US$2.1 billion loss on the demerger of South32 and a write-down of Nickel West assets. BHP declared a final dividend of US62 cents, bringing the full year dividend to US$1.24 per share, up 2 per cent on the previous year in US dollar and up 29 per cent in local currency. Management declared its commitment to its progressive dividend policy.
BHP expects ongoing economic reform in China to contribute to periods of market volatility. BHP is forecasting China's steel production to peak between 935-985m tonnes in the mid-2020s, with margins for low-cost iron ore production to remain strong. Following a dip in production in FY16, management expects average annual volume growth towards 5 per cent for the remainder of the decade.
Telstra (TLS) reported a net profit of $4.2 billion for FY15, in line with market expectations. Underlying income rose by 2.3 per cent to $26.3 billion, while earnings before interest, tax, depreciation and amortisation (EBITDA) rose 2 per cent to $10.8 billion, consistent with previous guidance. Telstra announced an increase in its final dividend to 15.5 cents per share, fully franked, taking its total dividend for FY15 to 30.5 cents.
Telstra CEO Andrew Penn pledged to maintain the company's market leadership in Australia, with additional investments planned to ensure its 4G mobile coverage reaches 99 per cent of the population. In FY16, Telstra expects to deliver mid-single-digit income growth and low-single-digit EBITDA growth, with free cash flow forecast at around $4.6 billion to $5.1 billion.