Reporting Season February 2017
The half year reporting season is upon us with many of the largest ASX companies having now reported their half year results. Here we provide a summary of some of these results focussing on a few of the main ASX sectors.
Although the results from the big four banks are certainly nothing to crow about, they have all reported more or less steady profitability from the prior corresponding period. NAB reported increased expenses as a result of wage costs but was able to partly offset this with improved productivity. One of the most important metrics for a bank, the net interest margin, was stable. Recently, all four banks have reported increased impairments from mining and agricultural exposed areas and although this improved in the reported half for NAB as a rebound in commodity prices helps the sector. The Commonwealth Bank (CBA) on the other hand had a slight increase in its impaired and troublesome assets as a result of this mining exposure. CBA's net profit after tax increased for the half despite a 17 basis point fall in its net interest margin. Low interest rate have been placing pressure on the net interest margin for all of the banks so this drop is not entirely unexpected. Overall, the banks are treading water or slightly improving profitability and are maintaining their dividend payments at or close to the levels of recent years. Looking forward the banks will most likely continue to see pressure on their interest margins unless interest rates rise from the current record low levels.
Turning to the mining sector, Rio Tinto (RIO) reported its full year results for the year ended 31 December 2016. A strong rebound in iron ore and coal prices has led a surge in profitability for the company and helped RIO report a US$5.1bn profit. Company profitability for many miners is improving from two directions, increased sales prices and reduced costs, and RIO is no exception. The downturn in commodity prices caused many miners to target aggressive cost reductions which are now starting to come to fruition. This, coupled with the increased sales prices, is causing a surge in the profit margin. RIO is a good example of this with US$1.6bn in pre-tax cost reductions having been achieved. Other miners, like Fortescue Metals (FMG), are having similar success with FMG reporting its 12th consecutive quarter of reduced production costs. Despite the strong results, most miners are maintaining a conservative posture, knowing that prices could turn around as quickly as they climbed. In general, the miners are paying down debt and continuing to cut costs. RIO announced a US$500m buyback of London listed stock although this was perhaps less than the market may have expected considering the company's strong result. As always the fortunes of the mining sector will depend on commodity prices. For now the outlook is positive as most companies are maintaining strong margins and generating large cash flows.
The telecommunications sector is still in the grip of a strongly competitive environment and an adjustment phase for dealing with the NBN. Telstra (TLS) reported its half year result on 16 February with EBITDA of $5.18bn falling $0.22bn short of expectations. Some of the problem comes from adjustments made by the regulators to various wholesale prices they can charge. Although Vocus (VOC) and TPG Telecom (TMP) have not released their half year results yet, we know that they are facing similar cost pressures. Last year VOC reduced its earnings guidance for FY17 with significant acquisition activity by the company in the recent past expected to cause a large amount of one-off costs. Looking forward, the sector will continue to face pressure from the strongly competitive environment. Nevertheless, the uncertainty surrounding the cost structure of the NBN should begin to resolve itself and allow the companies to adjust their business models accordingly.
The retail fashion sector continues to face pressure from overseas channels with Australia's seasonally adjusted December retail sales coming out at a disappointing -0.1%. Nevertheless, there have been a few standout performers in this area. Premier Investments (PMV), which owns brands like Smiggle, Just Jeans and Portmans (among others), expects to report an impressive result for its half year ended 28 January 2017. Sales are expected to increase by 7.1% compared to the prior corresponding half while EBIT should be approximately 10% higher. Similarily, Specialty Fashion Group (SFH) is anticipating an 11% increase in underlying EBITDA when it releases its results at the end of February. Local brands are expected to remain under pressure from international competition. H&M, for example, launched in Australia in 2015 and continues to open new stores. International fashion retailers Zara and UNIQLO are also increasing revenues and opening new stores throughout the country.
Overall this reporting season has probably been slightly positive (so far) although there are obviously both winners and losers. The rebound in the mining sector has certainly helped the ASX 200 achieve its 4.9% growth over the past 6 months and although the banks haven't been a standout from a results perspective, their share prices have recovered significantly due to the fact the market became too pessimistic about the prospects for the sector.
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