Bendigo & Adelaide Half Year Results
On 11 February 2019, Bendigo and Adelaide Bank Ltd. (BEN) reported its first-half results for the six months ended 31 December 2018 (1H19). BEN reported net profit after tax of AUD203.2m, down 12% on the prior corresponding period. Results were fairly soft, with growth in lending at 1% for the 12 months and margins down 3 basis points (bps). Lending growth was impacted by a decision to refocus the business banking division, leading to a contraction in lending although growth in its retail banking division was also below system averages. Agribusiness was up 4%. The outlook for lending growth should improve modestly, although margins are likely to remain under pressure given competition for new lending is incredibly tight. Costs were higher than expected, with BEN’s cost to income up 3 percentage points to 57.3%.
The underlying credit quality for BEN remains sound. BEN’s core equity tier 1 improved 15 bps to 8.76%, although it remains at the lower-end of peer comparisons. Arrears (impaired and 90-days past due) were broadly unchanged at 126 bps, albeit toward the top-end of peer averages, and likely to partly reflect the bank’s higher exposure to agriculture banking. We remain comfortable with BEN’s provisioning at around 50% of arrears. Credit losses remain very low at 8 bps. Funding remains a relative strength, with the bank sourcing more than 80% of its funding from customers (household and business).
Aurizon Holdings Half Year Results
Aurizon Holdings reported its 1HFY19 results on 11 February, with underlying EBIT down 16% to AUD406m. This was largely driven by the impact of the new regulatory determination for the company’s below rail network, as well as haulage volumes down by 5% due to contract expiry, industrial action and weather events. Free cash flow grew 8% to AUD371m over the period, in part supporting by the payment received under the Cliffs contract which was recently terminated.
Liquidity remains strong, with about AUD800m available, weighted average debt maturity of 4.8 years and no maturity until October 2020.
While the results were relatively soft, they were in line with expectations, given the current continued issue around setting up the revised tariff for Aurizon Network on the Central Queensland Coal Network and volume disruption (which should be largely seen as non-recurring). On the back of the results, Moody’s confirmed that Aurizon’s ratings were unaffected.
Transocean Quarterly Fleet Status Report
On 11 February 2019, Transocean released its quarterly fleet status update report, which provides an insight in the company’s current contract portfolio. As at the date of the report, the company reported a revenue backlog of USD12.2bn, up USD907m from the previous report. During the quarter, Transocean executed new contracts for five of its rigs in Australia, North Sea and Africa. The current revenue backlog would support revenue of about USD2.8bn in 2019 and USD2.2bn in 2020, absent any future contract wins. This backlog remains a key differentiator compared to peers, and is currently about 4 times larger than its immediate competitor. Transocean will report its full year FY18 results on 19 February.
Bristow Group Preliminary Third Quarter Results & Acquisition Termination
On 11 February 2019, Bristow Group released its preliminary results for 3Q18. While Adjusted EBITDA for the quarter was higher than expected at USD23.6m, this was down 32.4% on the prior corresponding period. This was primarily driven by decreased flight activity in the company’s oil and gas services segment, combined with higher rent expenses. The net loss for the quarter was USD85.9m compared to USD8.3m in 3Q17.
The relatively poor earnings translated in cash reducing by USD83m over the quarter, with an operating cash flow deficit of USD42m reflecting the continued challenging operating environment. As at 31 December 2018, the company had total available liquidity of USD236.9m, with no meaningful debt maturity until 2022.
Further, the company announced that its agreement to acquire Columbia Helicopters Inc had been terminated, noting that USD20m was paid to Columbia in connection with the termination.
In addition to the results release, Bristow Group announced that the release of its Quarterly Report would be delayed as Management has concluded that the company did not have adequate monitoring control processes in place related to non-financial covenants and this control deficiency identified represents a “material weakness” in internal controls over financial reporting. The company has indicated that it was aiming to release final quarterly results, including complete financial statements and accompanying notes no later than 19 February 2019.
Zenith Energy signs Power Purchase Agreement
On 12 February 2018, Zenith Energy announced that is wholly-owned subsidiary, Zenith Pacific (KLK) Pty Ltd, had signed a Power Purchase Agreement (PPA) for a 14.5MW gas fired power station at the Kirkalocka Gold Project in Western Australia. Under the terms of the PPA, Zenith will build, own and operate the power station, with supply commencing in the first quarter of FY20. The PPA has been executed with an initial term of 10 years and is expected to positively impact Zenith’s FY20 earnings.
This new contract maintains the strong track record that Zenith has established since issuance of the notes and supports the predictability and stability of its cash flows.
Suncorp Limited Half-Year Results
On 14 February 2019, Suncorp Limited (SUN) reported its first-half results for the six months ended 31 December 2018 (1H19). SUN reported net profit after tax of AUD250m in 1H19, down 45% from AUD452m in the prior corresponding period (pcp). Headline results were impacted by an increase in natural hazards above allowance and investment performance, as well as a write-down of goodwill related to the loss on sale of its Australian life insurance business. Operating earnings from continuing operations (that is, excluding Australian life insurance and the goodwill adjustment) were down 11%.
Gross written premiums for the Australian general insurance business were 2.4% higher to 4.1bn in 1H19, much of which from margin increases, although the insurance trading result was lower at AUD190m, from AUD266m in the pcp. Claims were higher, much of which relating to an increase in natural hazards (particularly the NSW and SEQ hailstorms). Unsurprisingly, the loss ratio was higher at 77.4%, while its combined ratio (a measure of underwriting profitability) increased to 98.2%, from 86.5% (a ratio below 100 percent indicates that the company is making underwriting profit). Natural hazard costs were AUD573m, AUD233m above allowances. The net impact to SUN under its reinsurance was AUD250m. Suncorp will increase its natural hazard allowance by AUD100m in FY20 and purchase an additional AUD200m in natural peril reinsurance cover. This, and the increased cost estimates in response to the Royal Commission findings are likely to partly explain the equity response after the results were announced (down around 4%).
Gross written premiums for the New Zealand general insurance business were stronger, up 9.2% to AUD768m, supported by both premium (margin) and unit (volume) growth. The insurance trading result was up strongly to AUD132m, benefiting from the forementioned increase in gross written premiums and a decline in claims expense.
Results for the group’s banking operations were modest, with soft lending growth (1.5% annualised) and lower net interest margins (off 7 basis points [bps], but only 3 bps half-on-half). Banking profit after tax was down modestly to AUD182m. The outlook is likely to remain challenging, although earnings should remain largely sound. Credit losses remain very low at just 2bps.
Capitalisation (as measured by common equity tier 1) across the group’s general insurance and banking operations were strong at 1.21x and 9.16%, respectively, both above board targets.
CenturyLink Rating Action
S&P Global Ratings has revised its outlook on CenturyLink to Stable from Negative. At the same time it affirmed all the company’s ratings. As part of its 4Q18 earning release CenturyLink announced that it will reduce its annual dividend by approximately 55%, saving around USD1bn in cash flow per year. It also lowered its leverage target to 2.75x-3.25x from 3.00x-4.00x.
S&P’s revised outlook reflects this more conservative financial policy. S&P stated that “Despite our expectation for low-to-mid-single digit percent revenue declines over the next year, the stable outlook reflects our view that costs savings along with improved discretionary cash flow (DCF) generation--due to the reduction of its dividend--should enable CenturyLink to maintain its adjusted leverage below our 4.5x downgrade threshold over the next year”.
4Q18 results were mixed. CenturyLink generated USD5.8bn of total revenue in the fourth quarter, representing a pro forma decline of 3.3% YoY. CenturyLink's focus on profitable revenue/ relationships led to further EBITDA improvements, with adjusted EBITDA growing 4.1% YoY to USD2.3bn. Adjusted EBITDA margin of 46.0% improved by 115 bps YoY, driven by margin improvements in both Business (+20 bps YoY) from a focus on profitable revenue and Consumer (513 bps YoY) on strong cost controls.
Mercer International Fourth Quarter Results
Mercer reported solid 4Q18 results with operating EBITDA increasing to a record USD118.1m from USD89.5m in 4Q17 and USD86.7m in 3Q18. The increase was primarily due to higher pulp and energy sales volumes, the positive impact of a stronger US dollar and lower per unit fibre costs.
Mercer completed its acquisition of DMI on 10 December 2018, so this had a minimal impact on earnings in the period. The acquisition however is material and is expected to increase pulp capacity by ~40% and EBITDA ~30%.
In terms of leverage, this increased slightly to 2.4x on a pro forma basis compared to 2.2x as at September 2018, due to the additional debt associated with the acquisition.
As at year end Mercer maintained its very good liquidity profile with cash of USD240.5m, and approximately USD184.5m available under its revolving credit facilities. Post balance date, the company established a CAD60.0m working capital facility for the acquired DMI business.
In terms of the market Mercer stated that it is starting to see increased pulp demand from China. In terms of lumber, the company says the European is strong and prices continue to be near multi-year highs and are expected to remain steady in the near term. However the U.S. lumber market is weak as a response to record pricing earlier in 2018 which resulted in increased supply and high customer inventory levels combined with a slower summer housing market.