The profit reporting season has delivered a fresh boost to market confidence with some very good results taking more than a few analysts by surprise.
Arguably the most important announcement came adjacent to BHP Billiton’s half-year result with the company appointing internal executive Andrew Mackenzie as the successor to Marius Kloppers.
Mr Mackenzie’s resume is impressive to say the least. He has outstanding academic credentials that are more than matched by his track record of achievement in the real world. In particular, his extensive background in oil and gas exploration after many years with BP will undoubtedly fortify BHP’s commitment to the US shale gas investments. But his minerals experience with Rio Tinto will also be invaluable as the world’s largest, most diversified major resource company begins to focus more on the higher value, tier one projects.
BHP’s result was a carbon copy of the issues we saw in RIO and FMG’s results where commodity price declines detracted from the outcome, but heavy cost-cutting from operations and a clear signal that the capital expenditure cycle is past its peak will contribute positively to cash flow. That will leave room for the respective boards to consider more capital management initiatives for shareholders.
The following table illustrates the impact of lower commodity prices on BHP’s interim result. We circled the iron ore and metallurgical coal factors as the largest contributors to the $5.9bn negative impact on underlying EBIT for the period.
Among the consumer stocks, Coca-Cola Amatil demonstrated that weak consumer spending and heavy price competition isn’t necessarily a barrier to delivering a good outcome for shareholders.
CCL’s net profit after tax for the 2012 year increased 5.0% to $558.4m before significant items allowing the company to not only increase its final dividend but to pay a special dividend of 3.5cps. The total dividend for the year of 59.5cps was 13.3% ahead of the previous year with a payout ratio of 76.4%.
The game will change for CCL as the current year progresses as the company gets ready to re-launch into the premium beer market. In between time, rapid growth in Indonesia and PNG accompanied by some quite clever cost innovations will keep this very well managed company on the move.
Another consumer stock that caught our eye was Super Retail Group. Its half-year profit of $60.6m included a full six months of the Rebel Group and Amart Sports for the first time. This company has played a straight bat on big box retailing and accumulated some significant runs over the last year or two.
We often jump to the back page of a profit release as that is usually where you can find a company’s outlook statement. For SUL, the news is all good with like-for-like sales growth of 5.5% at Super Cheap Auto for the first seven weeks of the current half-year, up 10% in the Leisure division (BCF, Ray’s Outdoors) and up 8% in the Sports division (Rebel, Amart).
In the media sector, results from Seven West Media, APN News and Media and Fairfax Media had the common elements of more impairment charges and continuing declines in advertising revenue.
The contrast with the result from Seek underlines the systemic shift of revenue, earnings and shareholder value from the traditional media businesses to the online media.
APN’s full year result for 2012 was nothing short of a disaster with $510.2m of impairment charges dominating the announcement. The company’s full year net profit after tax but before the exceptional items was a mere $54m, down 30% on 2011 and within guidance, but there was no hiding the massive writedown in the value of its publishing assets in Australia and New Zealand.
APN’s market capitalisation is just $185m and its net debt at $460m certainly requires some attention. Unfortunately for the CEO and a handful of board members, the proposal to raise equity has led to their demise with the major shareholders disagreeing with the plan.
In the financial sector, IAG, Suncorp and AMP produced reasonable numbers with the insurance sector finding some relief from incessant flood and fire claims across the period. No doubt that will tickle up again after the summer’s odd weather but the big insurers seem to be a little happier about life at the moment.
AMP has worked assiduously to bed down its takeover of AXA and is now starting to see the benefits. Its full year 2012 net profit of $704m was notable for the very good contribution from its core AMP Financial Services business.
It’s no coincidence that the market has enjoyed a strong run recently despite some initial apprehension about what the profit season would bring. Corporate balance sheets are in good shape generally and have hardly rated a mention. Revenue growth has been a bit patchy but on-going frugality on cost management has ensured that earnings growth has been comfortably adequate in most cases.
We are also impressed with the number of companies that have been confident enough to raise dividend payments to shareholders. This signals a renewed confidence in the outlook for earnings even if the commentary remains guarded.
When the dust settles on the reporting season, we will re-visit some of the more interesting announcements and delve a little deeper.