Peter Switzer: Hello, and welcome to Switzer Investing Insights, brought to you by nabtrade.
Peter Switzer: Today, we want to sum up reporting season. But before we do that, let's go to the two biggest
at the end of the week, namely Rio and Ramsay, Paul.
Paul Richard: Okay. Let's start with Rio, Peter. Underlying EBITDA at $18.1 billion. That was actually down 2% on the year before earnings. A little bit better, up 2%. So a pretty neutral result in terms of the headline, and the market will actually factor that in.
Paul Richard: What was a little surprising with the Rio result was not that we had a special dividend, but the size of it, and a special dividend of 243 US cents, or about $3.39 Australian.
Paul Richard: Add that to the normal dividend of 180 US cents, and that means shareholders are going to get in dividends, where the stock goes Ex, gets paid on the 18th of April, right about $5.80 Australian. That's a big chunk of money coming back to shareholders. from some of these mining companies continues, Peter. That was probably the highlight.
Paul Richard: Balance sheet on the slide in front of you says that net debt is down to just $8 billion US dollars. Two things to learn about this. First, this was a company that had a truckload of debt a few years ago. It was almost considered
Peter Switzer: A basket case.
Paul Richard: A basket case. But two, that's the amount, after they've paid the special dividends and paid some tax, and a few other things. As of the 31st of December, they actually had no debt, whatsoever. It really shows how strong that balance sheet has got.
Paul Richard: They also announced the discovery of sort of a promising gold and copper mine or mineral deposit at a place called Winu
Peter Switzer: Well-named.
Paul Richard: In Western Australia. What was a negative? The main thing, and we saw this in the BHP result is that cost pressures are better in the mining business is negative productivity. So the iron ore per unit costs aren't coming down. There are actually some cost headwinds, particularly to me, some of the best days of some of these miners is probably past it. They've done really a lot of work.
Peter Switzer: Kind of that record high in many areas, but it is coming off the
Paul Richard: And it's sort of like almost as good as it gets. I mean, look at Rio. It's at a 10-year high. Look, we know commodity prices are still supportive. If the iron ore price stays firm, Rio will keep going up. But the hard work about restoring the balance sheet, getting rid of the nonperforming assets, increasing production, getting more efficient, that's all done and that's going to get harder and harder. I think this stock is now sort of ... I won't say Peter
Peter Switzer: It's priced to perfection.
Paul Richard: But it's getting priced to perfection. If commodity prices go down, there is nothing to stop this. I think it's sort of in the profit-taking area.
Peter Switzer: Okay. Ramsay Health Care.
Paul Richard: On paper, it did look like a great result, but the market like this, this is actually as a stock that's had a rather tough 12 to 18 months, it used to be one of my all-time favourites, and there's actually a few green shoots for Ramsay. Let's go through the result.
Paul Richard: On the face of it, core NPAT up just 1% to $290.8 million and core EPS, so earnings per share up 1.2% to 140.6 cents. That doesn't look too outstanding. But they recently acquired a business called Capio that's largely based in Scandinavian countries, and that's actually a drag on earnings per share. That came onto the balance sheet in November. So EPS growth was actually up 1.9%, if you take that out.
Paul Richard: Digging in further, the result, there are some positives. So Australia hospitals, which of course, they're the number one hospital provider of private hospitals in Australia, way in front of Healthscope.
Paul Richard: Revenue was actually up 4.8%, which is pretty good with that market. And EBITDA up 5.7%, so that was a real tick.
Paul Richard: France,
Peter Switzer: They've had some problems.
Paul Richard: Had some problems. Look, that actually came in better than expected. So on paper, it doesn't look so good. Revenue up 2.3%, but EBITDA was up 5.3%. Much better than the market expected.
Paul Richard: What had been the negative is still the negative in this half, which is the UK business, that was still a drag on earnings and EBITDA was down 9.2%. There are actually positive signs in the second quarter, and they're expecting a tariff increase to come through on the first of April. Now, that's all subject to the national health scheme. It's very regulated in the UK. That's been a big drag on the earnings, but there's signs that it might be turning around.
Paul Richard: They were able to reaffirm their full year guidance of core EPS of 2%, and that includes Capio, which will actually be EPS negative.
Peter Switzer: Is this in the buy zone poor, or what?
Paul Richard: The market rallied on the back of it. I think Ramsay's is a stock for the portfolio. You may not be on this level. We may be waiting for some market weakness. But certainly, when health care stocks are under pressure, the market is under pressure, Ramsay is a great company. It is a stock to think about as a portfolio stock.
Peter Switzer: Getting back in your good books.
Paul Richard: And it's getting back in my good books.
Peter Switzer: Okay. Sum up the reporting season, Paul.
Paul Richard: At a top line, I think it's just been a tad disappointing. Now, it's not so much in the results, but think it's more in the outlook statements, Peter, and this is where the companies talk about what they're expecting for the next half, the next 12 months. They haven't really gone out of their way to tell us things are really on fire out there, and that's probably where the disappointing part.
Paul Richard: At the same time, there haven't been that many standouts, and there haven't that been really terrible results.
Peter Switzer: the Aussie economy. It's mixed, isn't it?
Paul Richard: It is mixed, without sort of being able to pick too many winners and too many losers. But overall, just a tad disappointing.
Paul Richard: I think the real standout of the reporting season has been the shareholder payouts and the money that is coming back to shareholders. Now, part of this is due because of resource companies are coming to the end of their cycle of selling assets and want to give your money back to shareholders. But it's also just as much about because of the possible change to an ALP government and the policy on franking credits. And any company out there at the moment is saying we've got lots of capital, we can see what might happen come the first of July. Franking credits are of no value to us in our hands. They're a value in the hands to shareholders. Maybe we do something on the dividend front.
Paul Richard: What we've seen are upsized ordinary dividends. We had a company like Woodside go to a 95% payout ratio. We've had special dividends from the likes of Rio, Wesfarmers, Fortescue, and others. And of course, off-market buybacks, one announced by Caltex, Woolworths, said it's going to do an off-market buyback now that it's the sale of its petrol business is cleared.
Paul Richard: These are all a way of giving dividends and franking credits back to their shareholders
Peter Switzer: And that money will be re-spent probably in the stock market because interest rates are so low.
Paul Richard: And that's one of the reasons why the market hasn't gone down, Peter, because there is so much cash out there because it's got to find a home. Interest rates now are low and no one thinks they're going to go up. So income type stocks are coming back into vogue, dividends are coming back into vogue, and I think that's going to provide some pretty good support for the market.
Peter Switzer: Anything else?
Paul Richard: Two other things. I mentioned before, the excess returns from resource companies, the BHPs and Rios that have been selling nonperforming assets, getting more productive, getting their balance sheet in order. I think that cycles. Increase in productivity, that cycle has almost come to an end, so don't expect those sort of returns, going forward.
Paul Richard: The other thing is I just caution there, that what I call the "China syndrome". We've had some very mixed results from companies that are doing business up in China. I think that it's a cautionary tale, Peter, because these have all at times have been market darlings. A2 Milk has done really well, but two very negative results from both Blackmores and Bellamy's.
Paul Richard: I think for investors, when you're seeing the China story, you've got to go in there with your eyes wide open, and just realize that things can change very quickly. We saw it again with a company like Crown. There's a lot of risk for these companies up there that can do well, but it's not a free market. I think as investors, just be wary of the over-hype about China sometimes.
Peter Switzer: Yeah. A pretty good assessment, Paul.
Peter Switzer: That's it for Investing Insights, brought to you by nabtrade. Thanks for joining us.
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