Peter Switzer: Hello and welcome to Switzer Investing Insights, brought to you by nabtrade. This is the greatest time of all, it's reporting season. People like Paul and I get excited at reporting season. It's week three, and we're gonna look at four really big guns, aren't we Paul?
Paul Rickard: We are. Let's start with the biggest of them all, Peter, BHP. In reporting, underlying a EBITR of 10.5B in U.S. dollars for the first half. That was actually down 3% on the previous corresponding half, largely due to some unplanned outages. For example, the derailment in the Pilbara certainly cost it some hundreds of million dollars.
Paul Rickard: On a dividend sense, continues its cash return to shareholders, a dividend of US 55 cents. Important to note that that's 18 cents above their minimum payout. They have a minimum payout of 50%, so they're actually supplementing that money, because they're doing so well and they've got lots of cash at the moment.
Peter Switzer: The problem of too much money.
Paul Rickard: Yeah, and it follows a special dividend of US $1.02. From a highlight point of view, they maintained their four-year cost guidance. This is important. They expect stronger volumes in the second half. So the second half profits should be up on the first half.
Paul Rickard: Look, the balance sheet's really strong. Net debts under their target, their minimum of sort of $10 billion. They're generating lots of cash and CAPEX they've got down to less than $8 billion, they expect the next couple of years.
Paul Rickard: The negative for me, Peter, was that there weren't any productivity gains. BHP's big about, in the last couple years, about being able to mine more efficiently and get more productive. Costs actually went the other way in this half, and productivity actually deteriorated. Now they say they're going to get back in the second half, but I think it's becoming stronger for the major miners. Look, I think this is about as close as it gets to
Peter Switzer: Perfection?
Paul Rickard: Well, perfection for BHP. Look, commodity prices are still supportive. Clearly, BHP and Rio have benefited the last few weeks from the disruption with Vale in Brazil. And if commodity prices stay supportive, those shares are going to keep on going up. But look, I think BHP's probably almost in profit territory for me at the moment.
Peter Switzer: Okay, mate. Let's go-
Paul Rickard: Or protected territory, I should say.
Peter Switzer: Yeah, but let's go to the next one, Woolworth's.
Paul Rickard: You know, again actually disappointed a little bit, Peter. And maybe because it's been priced and the market's been pretty supportive of Woolworth's. EBIT was only up 1% to $1,445 million and up 1.9%. The dividend just upped two cents to 45 cents per share.
Paul Rickard: Now the highlight, I guess, was the Australian Food, that's the supermarket division. Their margin improved and the sales improved. Actually returned to winning the supermarket wars, beating Cole's in the fourth quarter.
Peter Switzer: It's a big win.
Paul Rickard: Yeah, comparable sales growth of 2.7% versus 1.5%. So that was a positive. And the other positive for shareholders is they confirmed that following the sale of their petrol business, another $1.7 billion would be coming back to shareholders. That will be an off-market buyback. That'll be great for low rate taxpayers such as soft-managed super funds. Hopefully, they'll get that done before the 30th of June. It just needs one more confirmation from the FIRB, in terms of the sale.
Paul Rickard: Negatives, probably the surprise for the market. They had what had been a very successful endeavour drinks division, which is of course is their Dan Murphy's and other businesses. EBIT was down 6.9% as sales slowed and some cost pressures started to bite.
Paul Rickard: Big W, problem department store, that's still in the red. But sales are improving again.
Peter Switzer: I'm going to Say, I've been seen in the Big W store. It surprised me how good some of the stuff is.
Paul Rickard: But still losing money. And they had a fairly cautious forward-looking statement, talked about some cost headwinds, particularly through some of the EBA arrangements with their staff. So look, bottom line, a bit of a mess. I think the capital return will provide support. So for me, Woolworth's has come off a little bit. It's probably now in hold territory.
Peter Switzer: Yeah, and it's also got a lot of competition. Like growing all the time. There's even a new one that's coming to the market.
Peter Switzer: Yeah, Paul. Let's go to Cole's.
Paul Rickard: Cole's is also a mess. EBIT down 5.8% to $733 million, mainly due to the challenges with its convenience business. Supermarket business was actually flat. No dividend, but it did reconfirm guidance of a target payout ratio of 80% to 90% for its first dividend in September.
Paul Rickard: Look, sales growth of 3% for supermarkets, that wasn't too bad. But as we talked previously, Woolworth's has overtaken it the second quarter of that period. They've also announced a new agreement with [inaudible 00:04:32]. And it has to do with the supply of petrol at their convenience stores. It'll take sort of Cole's almost out of the loop, take away the vulnerability to petrol prices for Cole's. That should be a positive and see the convenience stores back on a more even playing field.
Paul Rickard: Negatives, look, unlike Woolworth's, their margin in supermarkets declined. That's due to higher costs, so Woolworth's is still a lot more efficient. And they talked about cost headwinds in most of their divisions. So look, bottom line, the market sold off. Cole's shares lost more than 9% over the two days following the result. I think there's a bit of value starting to emerge in the low $11. I always said that Cole's ... I didn't see it as a classic de-merger story. It was too priced upfront. Some of the analysts ... I thought it was sell at $13. I said it was a buy at $11. I'm starting to think Cole's looks like a reasonable value at $11. It's not going to shoot the lights up by any means. But it's largely a supermarket business. And I think despite the pressures from the others, it can basically produce those earnings and deliver a reasonably high dividend. I think as an income stock, $11 is starting to look attractive.
Peter Switzer: Yeah, okay. Let's go to Wesfarmers now, Paul.
Paul Rickard: Well, Wesfarmers is a surprise on the upside. So we had negatives by Woolworth's and Cole's. Wesfarmers is actually better than the market expected. NPET up 10.4% to $1080 million. That's from continue operations. That's largely due to the phenomenal success of Bunnings.
Peter Switzer: What a great story that is.
Paul Rickard: I think the market was a little bit surprised at the Bunnings result, because know that allegedly the home market's challenged and consumer sentiment.
Paul Rickard: ... have waned a little bit, so maybe that would impact on people wanting to spend on hardware and other things they'd buy at Bunnings. But look, EBIT for the Bunnings Australian division up 7.9%, now 58% of the group. And comparable store sales to 4%. And that's not bad when you looked at some of the retail sales figures. So Bunnings just continues to power ahead.
Paul Rickard: Also Officeworks did really well. EBIT up 11%.
Paul Rickard: The negatives were Kmart group. We know that Kmart has stalled a little bit after some great years. Target's still a drag, but at least sales at least were positive in Target for the first time. They also warned about the medium-term weakness for some earnings in the chemicals business in the second half. So Wesfarmers is that conglomerate.
Paul Rickard: The big news for shareholders was the dividend. While it's a dollar, and that's actually down from a $1.03 in the corresponding half of last year, it now only includes five months’ worth of Cole's business. So that's one of the reasons it's down. But they announced a special dividend of a dollar per share. And that again, was a real positive for the market.
Paul Rickard: Look, bottom line for me, Wesfarmers is pretty close to fully priced, so I'm not a buyer. I'm really waiting to see now they've got rid of a lot of businesses, what the next big acquisition or investment is. We haven't had any news on that. I think you've just got to be a little bit careful with Wesfarmers.
Paul Rickard: Great on Bunnings. Can it continue? But what's the next move for Wesfarmers?
Peter Switzer: Isn't it interesting that both Bunnings and Officeworks have done well? And they really had been pushing those businesses in the media.
Peter Switzer: Let's go to other reports for other super companies.
Paul Rickard: I think the general tone has been just a touch negative in the third week, Peter. I mean, there are a couple of things, and you can see on the screen in front of you some positive and negative reports. The China story's been really interesting. A2 Milk has done really well.
Peter Switzer: Well, yeah.
Paul Rickard: hasn't. And we've seen China
Peter Switzer: Babies are more important than older people good health.
Paul Rickard: Again, it's really hard to take out a trend. Widget did well, but Flight Centre didn't. So look, there've been some good surprises, some not too bad negatives. Overall, the surprises haven't been massive, and the negatives haven't been too bad. But I think the negatives probably outweigh the surprises, more so on some of the outlook statements are just a little more cautionary than the market would have expected.
Paul Rickard: But the market's actually rallied through earning season. I think that the other thing that's coming out of earning season, Peter, a lot of companies, they're giving me a lot of cash back, lots of special deals, off market buybacks ...
Peter Switzer: And people have to spend it.
Paul Rickard: People have to spend it. They're getting it ahead of any proposed change under a changing government. As we foresaw, we've talked about it many times, that money's got to come back into the market. And with interest rates now looking like they're staying low and one economist suggesting that interest rates are going to down in Australia, I think we're finding that sort of supply of money argument coming back and supporting share prices. So while it hasn't knocked your socks out, it hasn't been a disaster. But the market's actually found support and gone higher during earnings season.
Peter Switzer: Great analysis. So that's Switzer Investing Insights brought to you by nabtrade. Thanks for joining us.