First Impressions from Reporting

Bell Potter


In this daily reporting season update, we provide first impressions on key takeouts from companies reporting today, including QBE Insurance (QBE), ASX (ASX), Wesfarmers (WES), Cochlear (COH), Telstra Corporation (TLS), Mirvac (MGR), Tatts Group (TTS), Treasury Wine Estates (TWE) and Adelaide Brighton (ABC) with links through to more detailed reports.


QBE Insurance (QBE)

ROE 6.6% (BP 5.7%); Reserve release 1.8% NEP (BP 1.9% NEP); and 11. CET1 multiple 1.24x (BP 1.27x), PCA multiple 1.69x (BP 1.80x). GWP US$8.0bn (BP US$7.9bn); NEP US$6.0bn (BP US$5.6bn); COR 97.5% or 94.9% excluding US$156m one-off pre-tax UK Ogden charge (BP 98.0% or 95.2% excluding US$160m one-off pre-tax UK Ogden charge); Net investment yield 3.6% (BP 2.7%); Reported insurance profit margin 6.7% or 9.3% excluding the Ogden charge (BP 6.1% or 9.0% excluding the Ogden charge); GWP broadly in line but NEP US$440m higher largely due to US$329m lower reinsurance expense. This more than offset higher claims (costs broadly in line). US$79m higher cash NPAT was also helped by better investment returns (3.6% vs. top end of 2.5-3.0% guidance). Reserve releases were US$107m vs. our US$105m estimate. In summary, lower reinsurance expense and higher investment returns made the difference. The balance sheet remains strong with higher cash generation contributing to US$0.01 dividend increase.

Outlook: Modest GWP growth (constant currency, previously stable), COR upper end of 94.5-96.0% (previously 94.5-96.0%) and investment return.

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Revenue breakdown: Listings and Issuer Services steady, Trading Services up 7.2%, Equity Post Trade Services up 2.3%, Derivatives and OTC Markets up 1.2%. Derivatives: Revenue $269.1 million, up 1.2%- almost in line with our forecast of $271m; Higher futures volume and ETO activity stabilised. Net operating cash flow up 9.3% to $483.6m.

Outlook: “Solid start to FY18 with trading activity levels up in first 6 weeks.” Capex: FY18 guidance approximately $50 million.

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Wesfarmers (WES)

Coles EBIT down 13.5% to $1609m, EBIT margin decline to 4.1% as compared to 4.7% pcp although revenue was broadly in line with FY16. Food and Liquor comparative sales growth 1% (4.1% pcp). Bunnings EBIT up 2.6% to $1245m and EBIT margin 9.2% as compared to 10.5% pcp. Store-on-store sales growth 7.3%; strong growth in BANZ partially offset by the performance of Homebase in the United Kingdom and Ireland. Office Works up 7.5% to $144m with EBIT margin 7.3% as compared to 7.2% in pcp. Department Stores EBIT up 97.5% to $543m with K Mart up 17.7% to $553m and Target $3m. K Mart EBIT margin 9.9% (9.1% pcp) and comparable sales growth of 4.2% (10.5% in pcp). Target EBIT margin (0.1%) as compared to (1.4%) in pcp and comparable sales growth (14.9%). Industrials improved $868m to $915m. Resources $405m WesCEF up 34.4% to $395m, Industrial and Safety up 82.5% to $115m. Net operating cash flow up 26% to $4226m. Higher operating cash flows, lower net capital expenditure and the proceeds from the sale of Coles’ credit card receivables resulted in strong free cash flows of $4,173m.

Outlook: “Given diverse business operations & strong balance sheet, the Group remains generally optimistic in its outlook. Retail: Coles to focus on further improvements in fresh quality, merchandising & availability, while continuing to drive operational efficiencies to support investments in value & service; sales & margin pressures expected to persist in a very competitive environment. Industrials: WesCEF’s earnings expected to be affected by an anticipated oversupply in the WA EGAN market although good work undertaken to secure new contracts; solid sales momentum expected in Energy.”

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Cochlear (COH)

Cochlear implant (CI is 62% of total sales rev) sales revenue up 5% to $768m and implant unit sales up 8% to 32554. Services (sound processor upgrades and accessories is 25% of total sales rev) sales revenue up 6% to $306m. Acoustic (Bone conduction and acoustic implants is 13% of total sales rev) up 19% to $166m. Net operating cash flow up 40% to $259.8m.

Outlook: FY18 net profit guidance of $240-250 million, based on an AUD/USD of 80 cents.

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Telstra Corporation (TLS)

New dividend policy: TLS has announced a new div policy and from FY18 will payout 70-90% of underlying earnings. In addition, it will payout special dividends equivalent to 75% of net one-off NBN receipts. For FY18, Telstra expects the total dividend payment to be 22cps compared to our current forecast of 25cps. (i.e. implying a 30% decline in FY18 total dividend as compared to FY17). Potential for NBN monetisation (bringing them forward from a cash perspective): TLS is still considering a potential transaction to monetise LT NBN payments. If it is to proceed, the transaction would involve approx. 40% of the $1bn annual payments. The potential transaction remains subject to approval from TLS shareholders, the Government & NBN Co. TLS to invest up to $3 billion over the next three years to deliver economic benefits of more than $500 million of EBITDA by 2021. This is in addition to the usual capital spend and takes total capex including spectrum over the three years to FY2019 to more than $15 billion. Mobile EBITDA down 1.5%, Fixed-line down 10.5%, IP data & Access down 9.5%, Global connectivity up 3.8% and recurring NBN up 20.3%. Added 218,000 domestic retail mobile customer services and 132,000 domestic retail fixed broadband customers. NBN connections grew by 676,000 to 1,176,000 bringing total market share (excluding satellite) to 52%.

Outlook: FY18 guidance for total income of $28.3-30.2bn and EBITDA of $10.7-11.2bn is below current consensus of $11.3bn. TLS has made a positive move in re-basing the payout and allowing more capital to reinvest into its core business but the new dividend policy is likely to disappoint investors.

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Mirvac (MGR)

Net tangible assets (NTA) per stapled security of $2.13, up from $1.92, at June 2016 (current price $2.32). Office portfolio: Occupancy 97.6%, Net operating income like-for-like growth 0% as compared to 0.8% in pcp. Retail: Occupancy 99.4%, Net operating income like-for-like growth 3% as compared to 2% in pcp, Specialties comparable MAT growth 5.6% as compared to 4.2% in pcp. Industrial: Occupancy 95.3%, Net operating income like-for-like growth 2% as compared to 3.2% in pcp. Residential: Settled 3311 lots- up 17% from June 2016.

Outlook: Mirvac has provided operating EPS guidance of between 15.3 to 15.6 cpss for FY18, which represents an increase in earnings of between 6 to 8 per cent, and distribution guidance of 11.0 cpss, which represents DPS growth of 6 per cent.

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Tatts Group (TTS)

Tatts Lotteries: Revenue down 5.9% to $2014m, EBIT down 9.2% to $290.5m. Wagering: Revenue down 3.7 % to $587.5m, EBIT down 22% to $90.3m. EBITDA of $110.4m, down 17% was below our forecast $129 largely due to weaker margins. Max revenue up 2% to $120.7m, EBIT up 5% to $55m.  Maxtech revenue down 11.3% to $81.8m, EBIT up 125.6% to $7.7m. Net operating cash flow up 23.7% to $409.9m. Merger update: no new news on TAH’s update on 4th Aug-17. TTS shareholder vote is expected to be held in Oct-17. Merger implementation expected to complete by the end of 2017, subject to the ACCC and CrownBet's appeal against the Aust Competition Tribunal decision to be heard on 28/29th Aug-17.

Outlook: No financial guidance was provided, as expected.

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Treasury Wine Estates (TWE)

Total Volume up 8.5% to 36.4m 9L cases. Cost savings: Now saved $80m in supply chain optimisation, up from $41 million in FY16 driven by cost reduction and product asset optimisation. Company is on track to deliver at least $100m in run-rate savings before F20. The Diageo synergies are already at US$35 million, well ahead of planned FY20. Australian margins: Australia/NZ segment had flat revenue but EBITS up 11%. Margins expanded 320bp. Asia margin down in 2H: The Asian segment had EBITS growth of 25% in 2H17, but margins were down 159bp over pcp. TWE has also announced a $300 million on market buyback. Net operating cash flow down 13.2% to $472.5m.

Outlook: TWE has said it is comfortable with Bloomberg consensus for FY18e. That is $527m for EBIT, vs our forecast at $521 million. The company notes that analysts will need to refresh currency forecasts, which we would expect lead to small downgrades. Long-term the company is on a “journey” to 25% EBITS margins.

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Adelaide Brighton (ABC)

Core NPAT down 4% to $74.5m as compared to our forecast of $75.4m. Net operating cash flow down 21% to $77.2m. Operating cash flow impacted by reduced profit before tax compared to pcp but also timing of sales late in period. The Central Pre-Mix Concrete acquisition ($61m) in Melbourne added $1m to Underlying EBIT from March-17 and today included an additional $24.5m in M&A announcements that will benefit the 2H17 and be included in the FY17 Underlying NPAT guidance.

Outlook: Full year underlying NPAT excluding property expected of $188m to $198m.

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9 stocks mentioned

Bell Potter Securities is a leading Australian stockbroking, investment and financial advisory firm that provides a comprehensive offering of financial services to a diversified client base that includes individuals, institutions and corporations.

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