2019 Interim Reporting Season

posted in: Reporting Season | 0

Week 1 Summary

Three stocks caught our attention in the first week of reporting season.

  • ResMed (ASX: RMD)
  • AGL (ASX: AGL) and;
  • Commonwealth Bank (ASX: CBA)

These stocks, amongst a handful of others, have been on our radar as candidates for potential inclusion in our model portfolios. We view ResMed as a candidate for our growth portfolio, with growth opportunities arising from previous acquisitions. Our interest in AGL and CBA was due to their high yield, with both stocks trading at a discount to their Intrinsic Value.

1.      ResMed

ResMed reported their 2nd quarter 2019 trading results. Key highlights were: revenue rising by 8% to $651.1 million; Gross Margin expanding 70bps to 58.9% and; Net Profit increasing by 8%. Looking forward, the table below illustrates the market’s expectations of strong earnings growth continuing into the foreseeable future, underpinned by recent acquisitions (MatrixCare, Propeller Health, Apacheta Corporation) and the joint venture with Verily.

However, despite the improvement earnings, the stock failed to meet market expectations. RMD’s share price fell by 21% (from A$16.45 to A$12.96) following the release of the interim result, which was largely attributable to brokers downgrading future earnings.

                                  Source: ShareAnalysis & FactSet Consensus


2.      AGL Energy 

AGL delivered a 10% rise in underlying profit after tax (A$537M Vs A$487M) compared to the pcp, with the strong operational results driven by higher wholesale electricity prices.

However, the result was marred by statutory profit after tax declining by 53% to A$290M (Vs A$616M) due to a negative fair value adjustment of the carrying value of financial instruments on their balance sheet relating to futures contracts for wholesale electricity prices.

The movement in the period primarily reflected higher forward prices for electricity and is consistent with the way AGL hedges its electricity generation position through forward contracts. The futures contracts are expected to gradually roll-off by the end of June 2019.

The share price reacted by falling close to 5% on the day of the release but has been recovering.

AGL increased their interim dividend by 2% to 55cps (80% franked) flagging to the market the Board’s confidence in their outlook on operational growth.

In terms of our ShareAnalysis score, AGL was downgraded to B3 from B2 due to the balance sheet write-down. Despite the shift due to accounting requirements, this does not negatively impact the operational strength of the business.


                              Source: ShareAnalysis

3.      Commonwealth Bank of Australia

CBA has reported interim results largely in line with market expectations. Operating income declined slightly, with trading and fee income lower and with volume growth offsetting lower net interest margins, that declined by 4bp to 2.10%, largely due to higher funding costs and home loan switching and competition.

Operating expenses fell by 3% over the half year to December 31, a reduction of 3.1%.  

The ShareAnalysis quality and performance score has been reduced from A1 to A2 as a result of lower earnings growth expectations. However, CBA remains in a strong financial position meeting and adhering to liquidity requirements. While there are headwinds facing earnings growth, the core business remains robust and the Board’s outlook of distributing stable dividends, is seen as a sign of the Banks’ strong operational performance.

                              Source: ShareAnalysiss