24 March 2020

Twice a year we summarise the half-year and full-year results of the companies in the ALCE portfolio. The impact of the COVID-19 epidemic has overshadowed the results which were released in February 2020, because recessions are all but inevitable in Australia, the US, and Europe. For the companies reporting below, the impact of COVID-19 will not force radical changes in their business models; in other sectors such as airlines, hotels, cruise lines, and oil and gas exploration and production, many companies will not survive. For the companies in the ALCE portfolio, it is their operational performance which will determine how badly they are affected by the COVID-19 recession and how quickly they recover from it.



Net profit after tax (NPAT) for the December half came in at $432m, 11% better than the consensus forecast of $390m. The company had previously signalled that adverse macro factors would cause a profit fall compared to the first half of FY2019. FY20 guidance was unchanged. On the retail side, AGL is winning customers and reducing churn. On the wholesale side, generation was better than expected, while low wholesale prices have made life more difficult for many competitors. Operating cash flow rose 27% to $1135m, suggesting that the company has ample ability to fund major capital projects. The 44c interim dividend implies a comfortable 70% payout ratio.



December half net profit rose to USD 473m, and management increased guidance from 7% to 10 % earnings growth for the full year. The result was driven by improving volumes and margins in key segments, plus synergies from the Bemis acquisition. 85% of AMC’s packaging is used for personal consumption products such as food, beverages, healthcare, and cosmetics. The balance is used in specialized sectors such as tobacco. 46% of sales take place in North America, 29% in Europe, and only 4% in China. For these reasons we regard AMC as a defensive holding.



APA reported earnings before interest, tax and depreciation (EBITDA) of $842m for the December 2019 half year, which slightly exceeded market forecasts, but the company kept its full-year guidance unchanged at $1660-1690m. Operating cash flow was up 8.9% to $512m and the interim distribution increased from 21.5c to 23.0c. FY20 distributions are expected to total 50c, and FY20 cash flow is likely to cover capex and distributions. LNG import terminals in NSW and Victoria remain a long-term threat to APA’s pipeline volumes, but the recent collapse of Asian LNG prices has weakened the commercial case for these terminals.



A strong second half enabled CCL to beat the consensus forecast for its CY19 profit. Underlying NPAT came in at $399m, compared to $394m in CY18. Operating cash flow rose form $668m to $766m. Volumes rose 0.9%, versus the market expectation of an 0.5% fall. Operations in Indonesia and PNG performed well, but the Australian business continues to lag. EPS growth in CY20 will only be 1% to 2%, but the company faces low risk of downgrades caused by COVID-19. The recent fall in the Australian dollar will help CCL, because 42% of its EBIT is earned outside Australia.



COL met market expectations with a net profit of $489m (in the previous corresponding period it was still part of Wesfarmers), and paid a 30c fully franked dividend. Supermarkets did well, aided by the launch of more than 3,000 new products during the half. Liquor remains a problem area, with sales rising 3% but EBIT falling 10%. The surge of panic buying has boosted supermarket sales, and it is likely that many households will keep on hoarding their toilet paper and other goods for a year or more, until the danger of the coronavirus has clearly receded.



CQR’S first-half result showed that its focus on convenience centres is working well in a difficult retail environment. Distributions rose by 1.7% to 14.52c per unit, equivalent to a 91% payout ratio. The portfolio increased by 8.2% to $3223m, mainly due to net acquisitions. The weighted average capitalization rate is 6.1%. Occupancy is stable at 98.1%, including 123 renewals and 99 new leases, so that weighted average lease expiry is 6.9years. CQR has gearing of 32%, and its weighted average debt maturity is 4.4 years with no debt maturities before 2022. The main acquisition in the period was a 30% interest in a 49% stake in BP’s portfolio of 255 convenience stores attached to BP service stations, based on a weighted average capitalization rate of 5.5%.



The result for the December 2019 half year was in line with management guidance and market expectations. All divisions were performing satisfactorily, and the 25c interim dividend was maintained. Earnings quality improved sharply: the cash conversion ratio jumped from 51% in 1H19 to 84% in 1H20, and free cash flow leapt from $3.0m to $22.5m.



The profit number for the half year fell within management guidance, but the interim dividend was cut from 19c to 16c, so analysts have downgraded their forecasts. Because of acquisitions and divestments, the most useful measure of profit excludes discontinued operations. On this basis, underlying net profit after tax fell 39% from $93.1m to $56.6m, which lay in the guidance range of $56-58m, but the quality of the result was uneven. Funds under management rose 5.2% year on year, thanks to net inflows as well as rising markets.

IFL is attempting to build a new model of customer-centred financial advice, and it has advantages of scale as well as reputation. It has just completed the acquisition of ANZ P&I, which will make it the fifth largest platform in Australia, just ahead of Macquarie. However, the acquisition needs to generate synergies by 2021, and margins are currently under pressure.



The result for the year ended December 2019 met market expectations because management had already foreshadowed the decline in earnings. Funds under management rose by 14% because strong markets offset client outflows. 76% of funds under management were outperforming their benchmarks over periods of one, three and five years. The only problem area was quantitative equities, which had materially underperformed over one, three and five years. Hence it is likely that new inflows into the successful asset classes will comfortably exceed the outflows from quantitative equities. The company also announced a buyback of USD200m worth of shares.



Net profit for the December 2019 half fell short of expectations, mainly because of shrinking advertising markets. Generally speaking, digital media did well. Stan (subscription video on demand) turned profitable in the June 2019 half, increased profits in the December 2019 half, and is still gaining subscribers. 9Now (broadcast video on demand) increased its share of a fast-growing market. Domain (real estate website) suffered a dip in profits along with the housing market. Digital media now provides 40% of group EBIT.

The traditional media businesses are cutting costs but face falling ad revenues. In metropolitan free-to-air TV, the market shrank 7% in the December half. Digital subscriptions are becoming increasingly important, especially for the AFR. Gearing remains modest, and the company has re-financed its debt facilities. On 19 March the company withdrew the guidance in the result presentation, saying that even though the March quarter had been satisfactory, the outlook for advertising in the June quarter was too uncertain to predict.



First-half EBIT of $162m missed the consensus forecast by about 7%, mostly because of weakness in North American operations. Australian glass and can volumes and margins improved, but Australian fibre EBIT fell 20%. Operating cash flow was less than 80% of reported EBITDA for one-off reasons and is expected to improve in the second half. The interim dividend was flat, as forecast. FIRB has now waved through the sale of Orora’s Australasian fibre business to Nippon Paper. Management had previously indicated that about 80% of the $1.2bn proceeds would go to shareholders as buybacks or capital returns.



QBE’s CY19 result was disappointing, but the company is enjoying premium increases in all regions. On a constant currency basis, gross written premium (GWP) grew by 4.0%, and re-pricing in the December 2019 half averaged +8.3%. Cash return on equity rose from 8.0% in CY18 to 8.9% in CY19. Gearing is unchanged at 38%, and QBE’s capital position, as assessed by regulators and rating agencies, remains extremely strong. The share buyback has been suspended because management is considering the need to re-position for organic growth.



SCA’s first-half result shows that times are tough in the retail sector. The 19.9% increase in net property income was mostly due to acquisitions. Moving annual turnover sales growth in the portfolio improved to 2.6%, from 1.9% in the June 2019 half. The portfolio has an occupancy rate of 98.3%, a weighted average capitalization rate of 6.4% and a weighted average lease expiry of 7.8 years. Gearing is a little high at 33%, but weighted average debt maturity is 5.6 years.

Three quarters of SCP’s assets are neighbourhood centres, where the tenants are mainly supermarkets, medical, and non-discretionary services, so they are doing better than its sub-regional centres. Although fixed or CPI increases are written into leases, lease renewals are producing very little growth and new tenants none at all.



The first-half result met market expectations and management re-affirmed guidance of flat earnings and distributions. Residential earnings are improving as the number of settlements increases, office and industrial property continue to trade well, but retail remains weak, with falling values and minimal growth in rents, the same as other shopping centre landlords. Gearing of 26% is in the middle of the group’s target range.



Earnings fell slightly short of consensus forecasts, even though revenue met expectations. Underlying cash flow was up 22% to $674m, but it only covers 80% of the first-half distribution of 31c, so the group will have to keep re-gearing projects so as to release capital. Two new Australian toll roads will open at the end of this year, and the group has a good pipeline of projects over the next five years. TCL’s net debt to equity of 330% is well supported by the stability of its earnings, and the group benefits from lower interest rates.



The first-half result met market expectations, but VCX management downgraded previous guidance on the grounds that COVID-19 was negatively impacting sales-linked rentals, carparking, and hotel turnover. Retailer insolvencies continue, but for a landlord these are not so much a problem as an opportunity. Sales improved in almost all tenant categories, and occupancy was unchanged at 99.5%. The “flagship” centres such as Chadstone make up 47% of the VCX portfolio, and they performed better than most other centres. Gearing is a modest 37%, and weighted average debt maturity has increased from 4.1 to 5.4 years.



The 1H20 result beat market expectations by about 5%, and analyst forecasts have since been upgraded. Bunnings, which now provides 62% of earnings, enjoyed a 3.1% rise in EBIT, demonstrating that its profits are not tied to the housing cycle. Kmart, Officeworks and Chemicals/Energy/Fertilisers all performed satisfactorily. Target and Industrial & Safety are still losing ground and failing to earn their cost of capital. Group operating cash flow was 117% of net profit after tax plus depreciation.

WES took advantage of the result to raise another $1.0bn by selling 4.9% of Coles (retaining only 10.1%). This divestment replaces the $1.0bn spent on Kidman and Catch, so that the company has plenty of firepower for acquisitions. WES management rarely offers earnings guidance, but the commentary was upbeat for all operations except Target and Industrial & Safety.


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