From Jonathan Bayes, Investment Consultant, Bentleys Wealth Advisors.
Week 3 of reporting season over, and I need to take a breath.
As I said last week, this year’s reporting season has in large part been disappointing, and with that, highly volatile in terms of share price moves in response to numbers.
This week we again had the highs and lows – Healthscope (HSO) gave disappointing 2018 profit guidance and fell -16% on the week, Woolworths (WOW) and QUBE (QUB) also fell -4% and -7% respectively after results, whilst on the positive front Oil Search (OSH) rose +9% and Platinum Asset Management (PTM) jumped +7% after decent profit figures.
And these were just in the companies we had an interest in.
The likes of Bluescope (BSL) and Vocus (VOC) were both hammered well over -20% after high expectations in the case of BSL and a withdrawn takeover bid in the case of VOC, disappointed investors.
It’s tough, and it remains so.
The winners such as the likes of A2 Milk (A2M), skincare manufacturer BWX (BWX) and fresh-food group Costa (CGC) continue to motor ahead, and onto ever higher valuations, not unlike the manner in which the CSL (CSL) powerhouse has performed year-to-date.
But it’s a hard slog otherwise, as investors in Healthscope (HSO) this week learned.
Healthscope (HSO) – disappointing guidance, but perhaps a ‘kitchen-sinking’?
As a recap, HSO this week guided to ‘broadly similar’ operational profits from its hospital business in 2018, and this was a disappointment to the market since analysts had been forecasting for 8-10% type growth.
Hospitals make up nearly 85% of HSO profits, so this is of significance.
The stock has fallen well over the subsequent earnings downgrade, and this seems to indicate a sense of despair from investors who have seen HSO profit warn twice in the space of a year, and their shares fall over -40% from highs of $3.00 this time last year.
We are disappointed in the sense that we started advising investors pick the stock up in the low $2.20’s, but feel pretty confident that around current levels, longer term investors are getting some real value.
HSO is a classic case of greed and fear to our mind.
At $3.00 the stock made little sense to us for various reasons, but at the time the investor narrative for optimism related to ongoing population demographics and a need for a strong and profitable private hospital sector.
Today, with the shares now trading on under 18x downgraded earnings numbers, optimism is nowhere to be found, and instead you are likely to hear critics complain about the impact of the Federal Government’s crackdown on healthcare costs and the resultant impact that is having on hospital profitability.
The latter argument is not unfair, but is, in our opinion, largely factored into the share price.
Furthermore, what we don’t think the market is giving credit for is the successful completion and opening of its flagship Northern Beaches Hospital at Frenchs Forest in late 2018.
In fact, the pessimism associated with the broader HSO results has now extended to doubts regarding the successful launch of this hospital in spite of its blue-ribbon location and the fact it replaces existing hospital assets in the area.
In short, the Northern Beaches hospital looks terrific, but investors minds are now being muddied by the near-term disappointment associated with some slow start-ups elsewhere in the HSO hospital portfolio.
This we think is the opportunity, and the reason why we feel HSO is a stock to be adding to in this weakness.
Woolworths (WOW) – hitting its straps
WOW profit results were actually pretty good, not that you would think so given the selling in the share that took place on Thursday.
WOW ended up down -4% on the week in spite of posting a June quarter same-store-sales growth rate of +6.4%, blowing analyst forecasts away for the momentum they are delivering on the top line.
However, analysts claimed that the lack of operating leverage to this strong sales result is proof of the highly competitive environment in Australian supermarkets, and a demonstration that WOW would not see the full credit for its sparking sales momentum in group profits.
Personally, I think this view is too soon to be formed, and that WOW are highly likely to see further profit upgrades flow through during 2018.
Investors tend to underestimate the operating leverage supermarkets achieve to underlying sales momentum both on the upside, and indeed on the downside as we saw with WOW’s sales demise several years ago.
WOW cash-flows were extremely strong during the second half of 2017, and I would expect that WOW will see profit margins expand as it gets the virtuous circle of price discounting driving sales momentum driving supplier rebates driving further sales momentum.
It really is that simple.
Yes, Big W was a disappointment still, but it is a sideshow.
Yes, WOW has become more expensive of late, having run up +11-12% year-to-date, but I would fully expect to see the shares push back up towards $28-29 before we will consider lightening the load on this position.
Oil Search (OSH) – just ticking along, doing good things
OSH again posted superb operational numbers, expanding production guidance and lowering unit costs and future capital expenditure plans.
OSH keep ticking along, and simply need a modest tailwind in the oil market to push the stock back up through $8.00.
Their operating performance continues to be exceptional, and the company continue to have drilling success that will shore up future production well into the next decade too.
In the near-term we expect to hear more news about the proposed infrastructure sharing between the existing PNGLNG project (operated by Exxon) and the new Papua LNG project (operated by Total), with recent suggestions from OSH suggesting $5bn could be saved in development costs if Papua LNG chose to share facilities with the current PNGLNG operations.
That OSH has a material stake in both assets is terrific, but also makes OSH a highly likely takeover target for Total as the Papua LNG project progresses.
Platinum Asset Management (PTM) – good figures and a rather surprising +8% jump!
PTM delivered profits that were mostly in-line with forecasts and now sit rather expensively at 21-22x forward earnings.
It’s hard to think the shares have much more upside in them in the near term despite some excellent fund performance from their flagship Platinum International and Platinum Asia funds, however we do like what PTM are doing so would be keener to buy more lower.
Interestingly, MFG now trades at a 10% discount to PTM and has underperformed PTM by -30% in a little over 2 months – quite a substantial move.
Whilst I’m not convinced I am ready to buy MFG again just yet since I do think they their margins are becoming increasingly pressured, it does suggest that in a relative sense PTM is a little over its ski’s here in share price terms.
One-liners … results
Regis Healthcare (REG) figures were absolutely fine, and the company matched analyst expectations with guidance for largely flat profits in 2018.
However, do note that REG are likely to have a resolution to their current court case with the Federal Government as soon as October, and if they win, which nobody seems to be anticipating, REG and the broader industry could see near term upside of +10-15%.
The court case relates to the Governments decree that aged care providers could not charge and be recompensed for so-called ‘capital works charges’ as it was against the ‘spirit of the legislation’.
REG feel pretty confident in their case here since it is rather difficult to make a legal justification based upon the spirit of law when the law itself fails to specify details on this point.
We’ll see, but at $3.70 and with a 5.5% fully-franked dividend yield and a pipeline of still excellent bed growth, we think the worst has been seen for REG.
BHP (BHP) profit figures were in fact a little light on, but on the positive front the company did announce an intention to spin-off its US onshore oil business in a move that would likely yield them US$8-10bn (miles below what they paid for the assets).
BHP, like RIO and Fortescue (FMG) continue to benefit from the incredibly strong iron ore market seen in China year-to-date, and from the encouraging strength seen in other metals markets (copper notably) too.
Next Week …
This weekend we will get heaps of commentary out from global central bankers, many of whom are meeting at Jackson Hole in the US for their annual pow-wow.
The focus seems to be on what the European Central Bank Governor is likely to say in terms of his willingness and ability to continue with bond-buying (QE) in the Eurozone.
In local results we will get figures from Blackmores (BKL) and Mantra (MTR) on Tuesday (fingers crossed).
A final word on Australia and our deteriorating political climate to finish…
So if you looked at our share-market and the Australian Dollar, you wouldn’t know that the country was facing a small but growing threat of a change in government.
With the High Court now deliberating on the legality of several members of government’s right to sit as a parliamentary member, you would think there would be more concern that an unfavourable decision might force Australia back to the polls only a year after Turnbull’s last surprise election!
But nope. Not a fear seemingly.
But though it might be a longshot, it is entirely worth consideration since the likely outcome of any election right now would see government delivered to Labor, and in one fell swoop to my mind a ticket to our first recession in 25 years.
Again, I’m not being sensationalist for tor the sake of it, simply observing that with the current Oppositions policy on negative gearing, corporate tax cuts, personal tax hikes for high-income earners and more broader fiscal expansion, it is nigh on a surety to me that Australia falls into recession in that event.
Think it over.
It matters so long as Labor lead in the polls because at the very latest we will have a Federal Election by Q2 2019 and property investors are likely to vote with their feet well in advance of 2019 if Shorten and company continue to lead in the opinion polls.
Sombre thought eh.
Friday 11am Values
|S&P / ASX 200||5726||-4||-0.1%|
|Property Trust Index||1308||-24||-1.8%|
Thursday Closing Values
|U.S. S&P 500||2439||+9||+0.4%|
Key Dates: Australian Companies
|Mon 28th August||Earnings – Japara Healthcare (JHC), Lend Lease (LLC)
Div Ex Date – Aurizon (AZJ)
|Tue 29th August||Earnings – Blackmores (BKL), Mantra (MTR), Caltex (CTX)
|Wed 30th August||Earnings – Boral (BLD), Ramsay Healthcare (RHC)
Div Ex-Date – Telstra (TLS)
|Thu 31st August||Earnings – NextDC (NXT)
Div Ex-Date – NAVITAS (NVT)
|Fri 1st September||Div Ex-Date – Adelaide Brighton (ABC), Challenger (CGF)
25th August 2017, 330pm
For more information on the above please contact Robert Flynn, Bentleys Wealth Advisors directly or on 02 9220 0700.
This information is general in nature and is provided by Bentleys Wealth Advisors. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.