Bendigo and Adelaide Bank Ltd

BEN Details

Pressure on lending growth: Shares of Bendigo and Adelaide Bank Ltd (ASX: BEN) declined 3.3% on September 05, 2017, as the group traded ex-dividend. For FY17, BEN reported an after tax statutory profit of $429.6 million and 4.2% year on year (yoy) growth in underlying cash earnings on the prior corresponding period. Cash earnings per share increased by 1.2 cents to 88.5 cents compared to FY16. The Bank’s funding position continues to be industry leading, providing flexibility for executing on growth opportunities. Moreover, deposit gathering is a real strength for Bank and Retail deposits are up 4.7% during the year. However, recently introduced APRA’s lending caps have somewhat restricted that strong lending growth across the Retail (7.7% for the year), and Third-Party channels. Margin expansion was strong in the second half, up 8 basis points half on half, with an exit margin of 2.34%, driven by the need for mortgage repricing to respond to those regulatory caps on interest only and investor growth. Additionally, the bank’s disciplined approach to front book mortgage pricing led to better state following the May and August 2016 cash rate reductions putting pressure on net interest margin.


Financial performance; (Source: Company Reports)

Further, focus on efficiency has resulted in lower expenses as they remained flat year on year, and cost to income ratio moved down to 56.1%, as productivity gains were witnessed from continued investment in technology. Common Equity Tier1 Capital stood at 8.27%, and the banks’ ability to organically generate capital will enable it to achieve APRA’s unquestionably strong capital benchmarks within the required timeframe. Given the challenging banking sector and increasing pressure on margins, we maintain an “Expensive” rating on the stock at the current market price of $ 11.60

Boral Limited

BLD Details

Profit result benefited from a lower net interest expense: Boral Limited (ASX: BLD) edged a little lower as the stock traded ex-dividend. For the year ended 30 June 2017, BLD reported a 28% increase in underlying profit after tax at $343 million, led by all three divisions (Boral Australia, USG Boral and Boral North America) contributing to the improvement. After significant items, net profit after tax grew 16% to $297 million on the prior year. Sales revenue increased by 2% to $4.4 billion, including eight weeks of revenue from the Headwaters acquisition as well as underlying business growth. However, excluding the impact of lower reported revenues from US Bricks following the formation of the Meridian Brick JV in the USA, revenue increased by 8%. Accordingly, earnings before interest and tax (EBIT) before significant items increased 16% to $460 million, supported by growth in Boral Australia, USG Boral and Boral North America.


FY17 vs FY16 financial performance; (Source: Company Reports)

Additionally, the reported profit benefited from a lower net interest expense year-on-year due to the positive cash balance for part of the year following the equity raise, and a steady income tax expense as a result of the recognition of previously unrecognised tax losses in Australia and the US. A net loss of $46 million for significant items due to transaction costs in relation to the Headwaters acquisition and an asset impairment for the Bricks business in Western Australia, was partially offset by a net gain from divestments in the first half, including the sale of 40% share in Boral CSR Bricks and the formation of the Meridian Brick JV in the USA.

The stock has moved up 11% in the past six months while it is up 20.3% on YTD basis as on September 04, 2017. Given the volatility in property rates coupled with headwinds in the form of regulatory policies, we maintain an “Expensive” recommendation on the stock at the current market price of $ 6.49

Mortgage Choice Limited

MOC Details

Increasing complexity due to regulatory changes: Shares of Mortgage Choice Limited (ASX: MOC) dropped 7.3% on September 05, 2017, as it traded ex-dividend with about 7% annual dividend yield. For FY17, Mortgage Choice reported a 10.2% increase in NPAT on a cash basis at $22.6 million and $22.2 million on a statutory basis. Importantly, Mortgage Choice’s core broking business recorded its best result with settlements totalling $12.3 billion while loan book grew 3.2% yoy to $53.4 billion. Further, Funds Under Advice and Premiums in Force both rose significantly, up 60.3% and 26.0%, respectively to $532.4 million and $24.2 million. Moreover, FY17 witnessed an increased complexity across all areas of retail financial services and drove more consumers to Mortgage Choice. The volume and velocity of policy and pricing changes for lending products, as well as wealth and insurance solutions, were unprecedented.

FY17 Financial performance; (Source: Company Reports)
 
In March, APRA asked lenders to limit interest-only lending to 30% of all new residential mortgages driving further policy and pricing changes. APRA caps on investment lending growth continue to create policy and pricing change for investment lending and increasing the complexity in the market. The stock has moved up 18.1% in the past three months while it is up 17% in the past one year as on September 04, 2017. Given the challenging environment, we put an “Expensive” recommendation on the stock at the current price of $ 2.30

Oil Search Limited

OSH Details

Robust performance driven by higher realizations in oil and gas prices: Another stock that traded ex-dividend was Oil Search Limited (ASX: OSH) that slipped slightly on ASX. For H1FY17, OSH delivered net profit of US$129.1 million, more than five times of H1FY16 and 21% above 2016 full year core net profit. Sales revenue grew 16% yoy to US$676.2 million, driven by substantially higher average realised oil/condensate and LNG/gas prices, which increased by 28% and 26%, respectively. On the other hand, 12% reduction in operating costs resulted in a very competitive unit production cost at US$8.52 per boe and an increase in operating margin to 74%. Further, 13% reduction in depreciation and amortisation expense, was driven by lower depreciation and amortisation rates for the PNG LNG Project due to a material increase in Project reserves following the recertification.
 

H1FY17 Financial performance; (Source: Company Reports)

Based on the robust performance during H1FY17, full year production guidance has been upgraded, to be between 29.0 and 30.5 mmboe. Further, unit production cost guidance has been reduced from US$8.0 - 10.0/boe to US$8.0 - 9.50/boe, while unit depreciation and amortisation guidance has also been revised down, from US$12.0 - 13.0/boe to US$11.5 - 12.5 per boe. Given the improved guidance and anticipated cash flows from its Papua New Guinea (PNG) liquified natural gas (LNG) projects, we maintain a “Buy” recommendation on the stock at current market price of $ 6.59

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