With the interim reporting season virtually wrapped up, most analysts view the overall results as better than expected.
Shane Oliver, head of investment strategy and chief economist at AMP Capital, says 66% of companies have lifted profits from a year ago, while 55% of results have beaten expectations (against a “norm” of 45% for a reporting season). Importantly, in a low-yield environment, 62% of companies increased their dividends.
The major themes to emerge from the season came as little surprise: resources producers and mining services companies continue to find business tough, while there was reasonable growth shown by the rest of the market, helped by an ongoing focus on cost control.
The interim season did little to change broad earnings expectations for the full financial year, which are for a flat earnings performance. For the full-year, resources profits are seen as falling by about 20%, but this is expected to be offset by the banks delivering profit growth of about 8%, and the industrial stocks boosting profits by about 10%.
Broker Citi identifies one worrying statistic from the recent season: it says earnings downgrades for the full-year outweighed upgrades, with 25% of companies in its coverage sample reducing their forecasts for 2014-15, compared to 18% pushing guidance higher.
Here are some of the standout performers that caught our eye from the interim season:
Domino’s Pizza (DMP)
Domino’s Pizza is riding high on its status as a market darling, which is sometimes a poisoned chalice, but it is very hard to argue with the numbers that Don Meij and his team are generating from their business, on the back of digital innovation and a booming business in Japan.
For the December 2014 half-year, revenue surged 29.5% to $346.6 million, while net profit jumped 44% to a record $29.1 million, better than market expectations. Domino’s lifted its interim dividend by 6.9 cents, or 39%, to 24.6 cents a share.
Australia/New Zealand same-store sales rose by 10.6%, in Europe the rise was 7.5%, while Japan registered 1.2% growth (but Japan showed 16% growth in total, and a record sales month in December 2014). Return on equity was 20.9%.
On the back of the strong result, Domino’s upgraded its full-year profit growth guidance: the company had told the market to expect 25% net profit growth for the full-year – it has lifted that to 32.5%.
Domino’s opened a record 92 stores in the half, and expects to exceed this number in the second half. That will take it past 1,500 stores.
The only problem with Domino’s Pizza’s shares is that they are expensive – particularly after jumping 22% on the release of the result. On full-year FY15 analysts’ consensus numbers, DMP is priced at 50 times expected earnings, and a dividend yield of 1.7%. It’s no wonder that the analysts’ consensus target price is 5.6% lower than the current share price.
Domino’s Pizza (DMP)
Source: Yahoo!7 Finance, 2 March 2015
Ramsay Health Care (RHC)
The private hospital operator beat expectations on revenue, which rose 42% to $3.3 billion, and interim net profit, which increased 21% to $191.4 million. On what the company calls a “core net profit” basis (which removes one-off items), net profit rose 19% to $204.4 million. The interim dividend of 40.5 cents a share was up 6.5 cents, or 19.1%, on last year.
Ramsay also boosted its full-year guidance, saying it expected to lift core net profit by 18%–20% at the full-year, up from 14%–16% previously.
All parts of Ramsay’s business performed well as well, and the company got the first profit contribution from its French hospital business General de Sante, the largest private hospital operator in the country (a Ramsay-led joint venture took control in October 2014.) The company has positioned itself superbly for the growing “thematic” trend of rising demand for healthcare.
Like Domino’s, Ramsay has pushed into expensive territory: on analysts’ consensus forecasts, it is trading on a prospective price/earnings (P/E) ratio of 33.7 times earnings, and dividend yield of 1.5%.
Ramsay Health Care (RHC)
Source: Yahoo!7 Finance, 2 March 2015
QBE Insurance (QBE)
Insurance heavyweight QBE was one of the minority of companies that reported full year (calendar 2014) results in the season, and it brought out an excellent result, a $US742 million full-year profit – which represents a $US1 billion dollar turnaround from the $US254 million loss recorded in 2013. QBE’s performance was all the more meritorious given a 6% fall in revenue to $US18.2 billion, on the back of what the company describes as “economic headwinds,” including the strengthening US dollar, and a 9% fall in gross written premium, to US$16.3 billion. The full-year dividend was boosted by 5 cents, or 16%, to 37 Australian cents a share.
Investors also liked the improvements in the insurance profit margin, at 7.6% versus 5.5% in 2013, and the combined operating ratio, at 96.1% compared to 97.8% in 2013. (The insurance margin is the critical driver of an insurance company’s profit: it measures the company’s profit – which comes both from underwriting profit and the investment income earned on claims reserves – as a proportion of its net earned premium. The combined operating ratio (COR) shows the percentage of premiums received that are paid out in claims and expenses.)
QBE shares rose 7% on the back of the result – even though it actually came in short of analysts’ expectations – but the company knows that it needs to make further improvements in these key measurements for an insurance company. The market would ultimately like to see an insurance profit margin in the mid-to-high teens, and a COR in the low 90s. But the deteriorating trend has been arrested. In 2015, QBE is targeting gross written premium of $US15.5 billion–$US15.9 billion, net earned premium of $US12.6 billion–$US13 billion, a COR of 94%–95% and an insurance profit margin of 8.5%–10%. QBE says it is being conservative with those estimates, after a couple of years of disappointing the market. With the market not fully convinced, analysts still think there is some upside in the QBE price: the consensus target price is $13.57, or 4.5% above the present level. The most bullish broker, Morgan Stanley, sees the stock at $14.50.
QBE Insurance (QBE)
Source: Yahoo!7 Finance, 2 March 2015
Honourable mentions also go to mining giant Rio Tinto (RIO) and Qantas Airways (QAN). Another full-year reporter, Rio Tinto excelled, defying the slump in iron ore and coal prices to lift its net profit by 78%, to $US6.5 billion dollars, and lift its full-year dividend by 23 US cents, or 12%, to $US2.15 a share. Rio also announced a $US2 billion share buyback.
Qantas certainly impressed with the size of its turnaround, turning a $235 million net loss at the December 2013 half-year (on the way to a 2.8 billion net loss for the year) into a $203 million net profit for the December 2014 half-year, beating its own guidance. The result was the best first-half result since 2010 and the first half-year profit since 2012.
But despite the thumping return to profitability, there was no interim dividend, and the company elected not to provide full-year profit guidance, citing the high degree of volatility in economic conditions, fuel prices, and foreign exchange rates.
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