Earnings beats, Woodside wins and Downer's on the up and up

Brad Potter

Tyndall AM

Welcome to week three of August reporting season. It was a huge week as expected, with some big names, reporting some big numbers. We saw BHP and Woodside's much-anticipated merger get across the line, a big positive for both, but in different ways. Downer has also been rewarded by the market after posting two consecutive solid results.

In this wire, I'll analyse why these companies are now so well placed, as well as identify some of the key themes beginning to emerge as a greater proportion of companies report their results.


Will BHP's oil and gas merger with Woodside be good for investors?

The highly speculated Woodside BHP oil merger was finally announced early last week, through which BHP (ASX:BHP) will essentially vend its oil and gas business into Woodside (ASX:WPL) for scrip consideration, which will, in turn, be issued to BHP shareholders.

The combined group will have a market cap about double that of Woodside currently, which is around $40 billion.

This is a really transformational deal for Woodside. It places them as a top 10 independent oil and gas producer, with importantly 94% of production in OECD countries and 100% of production being conventional.

The balance sheet will be extraordinarily strong, with gearing of only 12% and very strong free cash flow which will allow the company to fund its growth projects internally.

Production remains predominantly gas with around 70% of 2021 production from that form. Detailed information on the merger is really sparse at present, meaning further consideration will be required post the release of the independent expert reports that are expected in the coming months.

Australian miner BHP is set to collapse its 20-year-old dual listed company structure. What's your take on this news?

BHP announced they are collapsing their dual-listed company structure, which we view positively as it has been a cost of capital anchor around the company for a number of years, and finally removes the reminder of the poorly conceived Billiton merger.

The merger gave 40% of BHP to Billiton shareholders, and has probably been one of the worst M&A transactions in Australian history. Tyndall voted against this merger.

The vast majority of BHP's earnings are generated in Australia – principally from the iron ore division. Therefore, franking credits have been building and sit currently above $12 billion. Under the dual listed structure it has been difficult and inefficient to access the franking.

The collapse of the structure does require a 75% approval from both the London shareholders and the limited shareholders in Australia and is expected to be completed prior to the oil and gas transaction with Woodside.

My expectation is that subject to the strong cash flows and balance sheet remaining, large structured off-market buybacks are likely in the future to utilize these large franking credit balances.

Downer has performed well following its earnings announcement. What were the highlights from the result?

Downer (ASX:DOW) has now provided two solid profit results in a row and has been well rewarded, with the share price reacting strongly on the day and subsequently. I think the market is now recognizing that Downer has essentially transformed into predominantly an urban services company that is more annuity-like in its earnings, and thus should be re-rated given the sustainability of profits.

They have significant exposure to the prevailing tailwinds around population growth, urbanization, technology, and, importantly, government spending and outsourcing. One of the key areas that the market is only starting to appreciate is that a number of its business units are set to benefit from the large de-carbonization revolution.

So, the outlook for Downer looks very positive.

What were the key themes to emerge in week three of reporting season?

We're now over halfway into the market reporting, with EPS beats of around 40%, and dividend beats around 31%. The beats to misses ratio is also very, very high. Given the uncertainty around the current lockdowns, as expected, only 25% of companies have provided guidance.

The falling iron ore price and associated slowdown in China is certainly weighing on the market at present.

It is still debatable whether this slowdown is China policy-related, COVID related, seasonal, or a combination of all three, I guess time will tell.



Get the latest reporting season insights 

Throughout August I will publish my thoughts on all the biggest news from the reporting season, including a look back on the week that was, and the things to look out for in the week ahead. Hit the 'follow' button below to stay up to date.


Brad Potter
Head of Australian Equities
Tyndall AM

Brad joined the business in 2002. He has 28 years’ experience primarily in the funds management and stockbroking industry, and has overall responsibility for managing the Australian equities team, process and portfolios. Prior to joining, Brad was...

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