NEWS + VIEWS – 28/02/2025
MARKETS
The US S&P 500 index is currently down -4.6% from its peak last week while the ASX 200 is -4.0% weaker. The Reserve Bank of Australia (RBA) delivered a long-awaited interest rate cut, however its outlook comments were more cautious than expected.
Iron ore futures received a little boost late last week when President Trump announced that a trade deal could possibly be done with China. Officials in China also said that further stimulus measures may be in train. Iron ore miners were the main beneficiaries of the announcements.
Most major Australian companies have now reported their December half earnings. There has been a further increase in share price volatility around results with movement of more than 9% on average on the day that companies report. UBS suggests that this may be due to stale earnings estimates resulting in bigger surprises up or down as well as previously inflated valuations.
PROFIT REPORTING SEASON
While the reporting season began strongly, company results over the last two weeks have been softer with disappointing bank results and falling earnings and dividend cuts for the miners. Despite this, 42% of results beat consensus expectations with 30% surprising on the downside.
NAB provides trading update
NAB provided its first-quarter update, in which its revenues were up 2% on the same quarter last year, however its top line earnings result was softer than expected. The core banking business result (excluding treasury and trading) was flat. As the market was expecting stronger growth, NAB’s share price fell around -8% on the day and is down more than -10% from where it was before the update was announced.
BHP disappoints
BHP reported a weaker-than-expected $US5.08 billion underlying half year profit, 23% lower than the same period last year and below the $US5.38 billion expected by analysts. Lower commodity prices, particularly for iron ore and coking coal, were the main cause of the result despite higher delivered volumes.
The interim dividend was cut 30% from last year to $US0.50 per share but that was expected. BHP is retaining some profits to fund upcoming major developments. On the copper front, BHP has large spending needs to maintain output in its Chile operations and has capital investment decisions to make on Olympic Dam. The company is also considering major development decisions in the US and Argentina.
BHP is diversifying its operations away from iron ore by adding copper and potash to its strategic focus while coal is gradually being exited. CEO Mike Henry talked about ‘green shoots’ in China’s recovery.
Rio Tinto (RIO) also diversifying
RIO reported a $US10.86 billion underlying full year profit, down -8% from last year, due to higher production costs and lower iron ore prices. The final dividend was cut to $US2.25 per share. Despite the weaker headline numbers, cash flow increased by 3%, buoyed by aluminium and copper results.
While RIO’s iron ore operation is still the major earner, copper and aluminium are now accounting for around 30% of total earnings. The $10 billion acquisition of lithium producer Arcadium, which is expected to settle next month, adds a fourth pillar to the company.
Wesfarmers (WES) powers on
In its half year result, WES reported that its revenue increased 3.6% and its net profit rose 2.9% to $1.5 billion. Bunnings continues its dominance with sales and earnings both up 3.1%. Kmart had a solid result with sales up 2% and earnings rising a creditable 7.2%, exceeding investors’ expectations.
Shareholders were rewarded with a $0.04 rise in dividend to $0.95 per share.
WesCEF (chemicals, energy and fertilisers) earnings were up 2.9% to $177 million, which was above market expectations. A $24 million loss in the lithium division reflects the start-up nature of the operation and lower lithium prices resulting from subdued demand for electric vehicles.
WES management has a strong track record in developing businesses across a range of industries including retail and mining. The wind down of the Catch on-line retail business suggests that they are also good at exiting businesses that have lesser prospects.
Telstra (TLS) solid
In a positive for its share price, TLS’ underlying earnings for the half year rose 6 % to $4.2 billion. The interim dividend of $0.095 per share, is up 5.6% on last year. Mobile profit rose 3.7% to $2.6 billion, driven by growth in user numbers.
TLS is building a Melbourne, Sydney and Canberra fibre network in preparation for an expected jump in data demand from AI, as well as rolling out AI internally across the business.
The company also announced a $750 million share buyback suggesting that they are confident in strong cash flow continuing.
TLS is the dominant mobile provider in Australia and its extensive network is a major ‘infrastructure’ asset owned by the company. Suggestions remain that it might carve it out of the business to ‘unlock’ its value.
Transurban (TCL) a good half
A $143 million expense for their failed dispute with ConnectEast resulted in a $15 million first half loss for TCL. Nevertheless, investors looked to a 3% drop in operational costs and a 2.4% increase in traffic volumes on its toll roads.
Management is confident that they can meet forecasts for the next six months and have maintained the $0.32 per share dividend.
Woodside Energy (WDS) record production
WDS reported that its full year underlying net profit fell 13% from the previous year to $US2.88 billion, due to lower realised oil and gas prices. However, record production of 193.9 million barrels of oil equivalent (MMboe) was at the top end of the full-year guidance range, underpinned by ‘outstanding early production at Sangomar and world-class reliability at operated LNG assets.’
CEO Meg O’Neill said that WDS is set to become a highly cash generative business. Sangomar (located offshore in Senegal) ramped up to maximum capacity within nine weeks of its June 2024 start-up, achieving 94% reliability in the fourth quarter. The Scarborough project is now 80% complete and on track for first LNG cargo in 2026. In Mexico, the Trion project is more than 20% complete and targeted for first oil in 2028. Last year, WDS made two acquisitions (Louisiana LNG and Beaumont New Ammonia) that will deliver long-term profitability and cash flow.
WDS is still waiting on Federal government approval to extend the licensing permits for its core offshore North West Shelf gas venture in Western Australia. O’Neill warned politicians that failure to approve a 40-year extension for the project would damage WA’s economy.
Woolworths (WOW) suffers
Despite a 3.7% increase in group sales to $35.9 million, WOW reported a 20.6% fall in first half underlying net profit to $739 million, largely due to industrial action, rising costs and supply chain challenges. The Australian Food business recorded a 2.7% increase in sales, but earnings fell by 12.8%, impacted by the ACCC legal proceedings and the strike of more than 1,500 warehouse workers from November to December.
WOW cut its interim dividend to $0.39 per share from $0.47 last year.
CEO Amanda Bardwell said that WOW has seen an acceleration in value-seeking behaviour since mid-2024, and that shift has continued. Cost-saving initiatives have begun along with continued investment in WOW’s supply chain infrastructure. The company is also preparing for the ACCC final report on supermarket pricing, which could have further implications for operations.
Coles (COL) gains advantage
COL reported a 6.4% rise in first half underlying net profit to $666 million, helped by the holiday season and the strike at WOW. Sales increased by 3.7% to $23.04 billion from a year ago, driven by a 4.3% rise in Supermarkets and 0.8% in Liquor. COL capitalised on the warehouse strike at WOW by doubling down on its supply chain and hiring more people at its stores in Victoria and New South Wales, resulting in incremental sales of $120 million.
The company declared an interim dividend of $0.37 per share, its highest since COL was spun out of WES in 2018.
Gerard O’Shaughnessy
P 0423 771 330
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