The market gives a tick to Dominos, ARB and Carsales
Investors in Dominos, ARB and Carsales have welcomed the companies’ 2019 results and near-term forecasts, pushing up the prices of all three companies. But it’s been a different story for Corporate Travel and GWA.
Despite general gloom in the car industry, both 2019 results and 2020 forecasts were roughly in line with market expectations. It should be noted that the results were assisted by a full year’s inclusion of SKEncar, without which earnings before interest, tax, depreciation and amortization(EBITDA) and net profit after tax (NPAT) would have been slightly below 2018. It should also be noted that the result excluded the Stratton Finance business which operated at a loss in the second half of the year, was written down and on the sale block.
Carsales reported revenue of $418 million, EBITDA of $210 million, which was 7 per cent higher and NPAT of $131 million up 3 per cent and in line with earlier guidance. Breaking down the revenue into its constituents, dealer revenues were 7 per cent higher, private revenues were 4 per cent higher, and display advertising revenue fell 13 per cent. Revenues from the Korean business were 13 per cent higher and from Latin America (Brazil, Chile, Mexico, Argentina) 11 per cent higher than the previous year.
The company surprised by offering more optimistic guidance for 2020, noted a ‘solid’ start to the year in core Australian dealer, private and data businesses and assumed “gradual recovery in Australian auto conditions across the year.” Carsales also noted it expects Tyresales and Redbook to show growth in FY2020 but that market conditions remain challenging for display advertising. Strong expected performances from Korea and Brazil again in 2020 will also assist.
Domino’s Pizza (ASX:DMP)
Dominos reported revenues up 14 per cent, a 9 per cent increase in EBITDA and 6 per cent growth in NPAT.
EBIT was 3 per cent below guidance which consensus had attached itself to. Consensus might also be disappointed with the weaker than expected store rollout and Australia/NZ and European margins. The weaker than expected margins suggest the company is contributing to supporting franchisees amid a tougher revenue environment. The second half was particularly weak.
The company opened 179 new stores (21 in Australia and New Zealand, 81 in Japan, 77 in Europe) in 2019, which was materially below its guidance to the market of 200-220 stores. Given the 77 stores opened in the first half, it implies 102 in the second half with significant under-delivery in Australia/NZ.
The company reiterated its 3-5 year guidance, including footprint growth of between 7 and 9 per cent, revenue growth of 10 per cent and same store sales growth of 3 to 6 percent. Given the market was disappointed by the undercooked footprint/store growth for FY2019, it will have to regain some trust that the company will still meet its 3-5 year targets.
With the share price up 22 per cent since the start of August, investors will be keen to hear more from the company about store rollout and margins, which it was relatively quiet about.
ARB Corporation Ltd (ASX:ARB)
We regard ARB as one of the high quality companies listed on the ASX. The company reported 5.8 per cent growth in underlying net profit after tax to $57.1 million. There was some benefit from a lower tax rate; however the result, including gross margins and cost management, was admirable given a challenging macroeconomic picture in the second half and therefore revenue environment.
Given a historical PE of 28 times and forward PE of about 24 times, there’s not much safety if conditions deteriorate further rather than rebound.
Corporate Travel Management (ASX:CTD)
Corporate Travel Management has been the subject of controversy recently with a hedge fund shorting the stock and criticising management.
The company reported NPAT of $96.9 million which was 6 per cent below consensus forecasts despite the benefit of a lower AUD. EBITDA of $150.1 million however was up 19.6 per cent on 2019 and in line with expectations, which was a relatively solid performance given the stagnating macroeconomic backdrop, Brexit, trade wars and a Federal election.
Cash conversion was very strong. Operating cash flow rose 41 per cent to $133.5 million and was due to 113 per cent cash flow conversion versus management’s guidance for 100 per cent conversion.
The company expects 9.9-17 per cent EBITDA growth for 2020 to $165 million-$175 million. The lower end of the range assumes a continuation, through the first half of the year, of Brexit uncertainty, trade wars and the protests in Hong Kong. Even at the top, however, the guidance is weaker than consensus expectations of $176.5 million.
GWA Holdings (ASX:GWA)
This is an important result for an insight into conditions in the residential construction sector.
The company reported NPAT of $51.8 million which was 7 per cent lower than the previous year and a couple of per cent below consensus expectations.
The company noted that the outlook for their core renovation and replacement market (which is 52 per cent of revenue) is softer. We of course currently expect it to soften further before improving. The company also noted that the recent Methven acquisition (roughly 15 per cent of earnings), which the company had previously said in presentations to investors would “enhance regional diversity of revenue and earnings and IP in showers/tap” has seen EBIT down 33 per cent due to a decline in Australia/NZ housing activity.
Of course, management have indicated improved performance of Methven under their stewardship but there is only so much management can do if residential construction activity follows the leading slump of 40 per cent year-on-year in residential approvals.
Yes, house prices and auction clearance rates are improving but construction is about to slip heavily.