THE DISTILLERY: Earnings wake-up call

Earnings roll on and so do company analyses. Profits may generally be holding, but net interest is waning.

Ian Verrender of The Sydney Morning Herald does a creditable job on the bind Transurban finds itself in. "[CEO Chris] Lynch's plans for the future – growth through acquisition – could well hit a dead end. As he outlined a vision of picking up quality assets, like the bankrupt Lane Cove Tunnel, at reasonable prices, Lynch made it clear the bad old days of debt-driven growth were long gone. Acquisitions, he said, would be accompanied by an equity raising that hopefully would appeal to shareholders. That places Lynch in a huge dilemma. His biggest shareholders are the Canada Pension Plan Investment Board and the Ontario Teachers Pension Plan, which last November put a $5.25 per share informal takeover offer on the table to buy the company. Since the rebuff in early November, there has been minimal contact; just some brief communications between advisers. The Canadians ... have let it be known that they wouldn't be keen to contribute to any capital raising.”

The "dilemma for Lynch” is seen slightly differently by Stephen Bartholomeusz of Business Spectator. "The Canadians remain on his register and are potential predators ... any equity raising to fund acquisitions could increase Transurban's vulnerability as it would allow the Canadians to offer security holders the opportunity to sell their holdings at a premium rather than buy more at a discount.”

John Durie of The Australian is most forthright, bless him, on the machinations of "the 42 per cent of [Transurban's] share register that have expressed interest in taking control, plus David Murray at the Future Fund who somehow thought it sensible to declare his hand ... Just what Murray was thinking when he confided he was talking with the Canadians is not known, but it was irresponsible and should be clarified at the earliest opportunity ... This is particular so given [Lynch] has hunted up and down his share register but is yet to find evidence Murray's team actually own the small holding they claim to in the company ... Mystery too surrounds 15 per cent holder CP2 now that its leading light Peter Dougherty has stepped down through ill health and the market is alive with talk the partnership is not a happy one.”

Matthew Stevens of the The Australian (and Durie) address Coca-Cole Amatil. The two find themselves in simpatico, both making favourable comparisons with Foster's in terms of capital control. Stevens' approves because Coke is a "mature business managing strong legacy assets and working at delivering relatively low risk, material growth from new businesses.” He goes on, "... CCA doesn't suffer the same capital allocation mismatch that we see at Foster's, where a wine business generating margins of barely 10 per cent successfully competes for capital with a beer business generating better that 38 cents profit from every dollar of sales.”

Durie sees potential flies in the capital control ointment, "... the magic [Coke] formula. [It] is now ramping up the capital spend in Indonesia, with $40m spent last year, double that this year, and all the while capital expenditure to sales has been slashed. Last year alone the group ratio was 7 per cent and in Indonesia it was 14.3 per cent. The country accounts for 16 per cent of sales and just 8 per cent of earnings, even if earnings grew by 22.1 per cent.” He also points out that "the SPC Ardmona purchase is yet to earn its keep, given it accounts for 36 per cent of funds employed and contributes 12 per cent to earnings per share.”

This column will add that with significant and rising earnings exposure to Asia, the strong Aussie dollar is an ongoing issue – a subject neither commentator covered.

Malcolm Maiden of The Age focuses his attention on whether or not AXA AP's upgraded profit is "sustainable”. His conclusion is "that not all of the gain will be kept, but enough of it will be to maintain NAB and AMP's interest ... Yesterday's profit result shows an expected bounce deriving from what might be called the resumption of normal economic, business and market conditions ... The $722.7 million investment 'experience' markdown that wiped out last year's operating profit and pushed AXA AP to a non-cash loss of $278.7 million in 2008 was replaced by a $35.1 million write-up in 2009. And while operating earnings were flat at $553.6 million, they were up 17 per cent in the second half compared with the first half ... Earnings from the Australian wealth management and insurance businesses that NAB and AMP are pursuing displayed the same trend, falling by 25 per cent to $176 million year-on-year, but rising by 35 per cent in the second half of the year compared with the first half ... The Australian operation did secure an earnings rise of about $10 million from so-called 'experience profit' – earnings above or below what AXA AP had planned – that are as likely to be reversed as retained. And while management expenses in the local operation fell by 9 per cent from $297 million to $269.7 million, saving AXA AP $27.1 million, the cuts were forged in the crucible of the crisis. Inevitably there will be slippage as conditions normalise.”

Westfield falls under the gaze of Alan Jury at The Australian Financial Review. He sees the Lowy's preparing for "additional development opportunities” with more conservative gearing of 35.8 per cent on debt to total assets and 66 per cent debt to equity. Jury also points out the firm has $7.8 billion of available liquidity. Jury also notes that Westfield's "recovery leverage is skewed to the US economy, where 55 per cent of its shopping centres and 56 per cent of its gross lettable space is. However, these centres represent just 32 per cent of the portfolio's value.” Jury concludes that the US too, might contain more than its fair share of the "strategic development opportunities”. This column has some difficulty reconciling these two lines of reasoning. If already over-exposed to the US – where retail over-development is huge, especially in mall space – perhaps it's time the Lowy boys looked at Asia.

Elizabeth Knight of The Sydney Morning Herald takes on Brambles. She sees three problems. One, "Brambles has not only lost customers but it also has experienced what it calls a change in mix – that is, it has lost higher-margin, more profitable customers and has replaced them with lower-margin contracts.” Two ,and related, "... Brambles can boast dominance in its established markets, which makes customer satisfaction and innovation such an essential element of the business. However, this also exposes Brambles to the prospect of competition.” Three, "... Brambles is mainly a logistics company – and in a slower economy fewer goods need to be transported. This column will add that much of the global recovery in inventories is behind us, which is starting to show up in US container volumes. Pallet traffic may be set to fall.

Knight concludes that "...in common with several companies reporting earnings this week, Brambles is hanging its hat on greatly enhanced cash flows – primarily the result of cutting costs and capital expenditure. Brambles is promising to retain capital expenditure at these low levels for at least the remainder of the financial year and undoubtedly won't ramp that up until its revenue and pricing power improves.” But if Knight's first two forces gather pace, capex is going to have to rise, and fast. Brambles remains a sell.

All up, a panoply of explanation and conventional wisdom with few highlights. Where is something new?