Equities

As the reporting season avalanche gathers pace, a few company reports have really caught our eye. Here’s our take on reports by BHP, a2 Milk, Beacon Lighting and Worley Parsons, and what each firm is saying about their near-term prospects.

BHP (ASX:BHP)

BHP posted its largest annual profit in five years along with a record dividend. Importantly, however, BHP’s Andrew Mackenzie flagged headwinds that could adversely impact global demand, including a lack of growth in Chinese demand for steel due to flat to slowing infrastructure spending next year as well as declining economic indications from other developed economies. He also suggested cost pressures would continue to rise as they have already in the petroleum and coal divisions, albeit partly due to weather conditions. It is possible that with rising costs, gradually rising capital expenditure, lower realised commodity prices, and fewer asset sales, capital returns to shareholders may have peaked.

a2 Milk (ASX:A2M)

The a2 Milk Company is considered the marketing leader in a2-only protein based dairy products and is one of Australia and New Zealand’s largest infant formula producers with operations in New Zealand, Australia, USA and China through supply and distribution agreements.

For 2019, a2 Milk’s revenue increased by 41.4 per cent to NZ$1.3 billion and EBITDA increased 46.1 per cent to NZ$413.6. The EBITDA margin was 31.5 per cent. Record market share in each region (6.4 per cent China and 11.2 per cent Australasia) helped deliver the result.

The market however was expecting 42.4 per cent revenue growth and a 32.4 per cent margin so a2 Milk’s full year results missed consensus at the revenue and EBITDA level due to weaker margins.

Strong revenue growth numbers were recorded in all regions. Australia and New Zealand were up slightly more than 28 per cent to NZ$843 million, Asian revenue was almost 74 per cent higher at NZ$406 million, USA revenue jumped 161 per cent, from a very low base, to NZ$34.5 million, and UK revenue climbed 12.7 per cent to NZ$21.5 million. Once again, China/Asia missed consensus by more than 12 per cent.

Margin pressure is now expected to continue with next year’s EBITDA guidance suggesting margins are 13 per cent lower than the market projected. The company noted that FY20 EBITDA margin “to be broadly consistent with 2H19 EBITDA margin of 28.2 per cent”. The market was expecting 32.0 per cent. The change applies a 12 per cent downgrade at the EBITDA level for FY20 unless revenue can exceed forecasts by more than 10 per cent.

Beacon Lighting (ASX: BLX)

As expected, and publicised by us here and in The Australian, it was a tough year for Beacon Lighting. FY2019 NPAT fell 17 per cent and while it first looks as though the company met consensus expectations, those expectations were only recently guided lower by the company.

BLX’s FY2019 revenue rose 2.5 per cent while gross margins declined by 170 basis points. As we previously warned, Beacon’s like-for-like sales growth turned negative in the second half of the year. The company and others attribute the weakness to the election and lower housing sales activity. While listing and sales of established properties may pick up in the spring, and therefore assist demand for renovations and additions, a significant slump in building activity for new free standing and high-rise dwellings is still to come (unless the RBA, tax rebates and APRA changes suddenly trigger renewed demand for construction of new dwellings).

The company’s online efforts and investment are heading in the right direction with online sales 22 per cent higher than last year and now 5 per cent of sales.

Management were positive about FY2020’s start but they base this optimism on the hope the RBA, APRA and the ATO will help to stimulate activity in housing and real estate.

Worley Parsons (ASX: WOR)

For 2019, Worley’s revenue rose 36 per cent to $6.44 billion. Of this growth, organic sales growth was 17 per cent with the remainder the product of the acquisition of Jacobs ECR.

EBIT was 29 per cent higher to $385 million and core NPAT was 40 per cent higher at $239 million.Net profit before amortisation (NPATA) jumped 42.7 per cent to $259.8 million and included a two-month contribution from the newly acquired Jacobs ECR business, in which Worley recently reiterated upgraded cost synergies of A$150 million. Worley also noted the integration of Jacobs ECR is running to schedule.

Management were optimistic about the global economy in the medium term but more cautious in the short term, citing “macroeconomic global uncertainty”.

Importantly, the backlog number as at June 2019 was upgraded from $17.4 billion to $18 billion.



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