Reporting Season Highlights

We recap some of the profit reporting season highlights from the past week including Macquarie Group, Bendigo and Adelaide Bank, Suncorp Group and JB Hi-Fi. Full reports are available below via links.

Macquarie Group (MQG)

We continue to view the business as a long term “Cash and Growth” story with sufficient flexibility to ride out any volatile operating environment (Royal Commission, Australian federal election, etc.).  Our positive view of MQG is also underpinned by a strong financial position, deep expertise in major markets, proven risk management culture and execution skills, effective cost management and the ability to adapt the overall business mix to changing market conditions. We maintain MQG’s $135.00 price target and strong Buy rating. 

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Bendigo and Adelaide Bank (BEN)

We have lowered our price target to $10.20, reflecting lower NIM prospects, better bank fees and commissions and slight downward adjustments to credit expenses.  The end result is ~5% lower cash NPAT across the forecast horizon.  Including reduced notional surplus capital of $0.14 per share (previously $0.34), the price target is lowered by ~7% to $10.20 (previously $11.00).  Our Hold rating is unchanged.

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Suncorp Bank (SUN)

SUN had a mixed result with good general insurance outcomes in Australia (despite December’s hailstorms in NSW and SE QLD) and in New Zealand offset by a softer banking performance before impairment losses (in line with industry slowdown and BEN’s first half experience). Relative to our forecasts, cash NPAT and EPS were off by 5-6% mainly due to specific items such as investment income on Group capital, consolidation adjustments, transaction costs, non-controlling interests and net external funding expense. However, the more important measure is Group profit after tax from business lines that was broadly in line while cash NPAT and EPS. We had expected a reported loss of $476m in 1H19 after assuming the $880m after tax non-cash loss on sale of its life business will occur in that period. Instead, $145m goodwill write-down was reflected in 1H19 and the residual loss will now be taken in 2H19.

Changes to our estimates in 2020 and beyond are not material and we have maintained SUN’s $13.75 price target and Hold rating (the latter is appropriate in our view given a $600m capital return and yet a tougher operating environment ahead).

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JB Hi-Fi Limited (JBH)

JBH announced underlying 1H19 EBITDA of $264.3m, 2.9% ahead vs BPe due to a 1.3% beat on sales and a ~16bps beat on gross margin. Underlying NPAT of $160.1m was 7% ahead vs BPe, boosted by lower than expected D&A. FY19 sales guidance was reaffirmed at $7.1b, and new NPAT guidance of $237m-$245m (vs consensus of $241m) was provided. While we acknowledge this is a creditable first half result in an increasingly challenging discretionary retail environment, in our view there were also a number of key ‘red flags’ that point to a deteriorating outlook.

We retain our Sell rating. Our price target is broadly unchanged at $20.20 (previously $20.00). We believe external headwinds present risks to JBH’s 2H19/FY20 outlook and stem from a more cautious consumer, softer housing market & increasing competition. We believe red flags in the result support this thesis.

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