On the surface corporate earnings releases qualify as “report cards,” quantifying past performance. But future guidance and management commentary take company earnings reports beyond the immediate into the future. They offer clues as to what to expect in coming months.
Right now we have some evidence there is reason to worry about our property market, especially in the residential sector. The Economist Magazine recently reported Australian home prices were down 2.1% year over year but by their measures were still 36% overvalued: While new home sales rose slightly in the most recent quarter, the increase was due to multi-unit dwellings, not detached homes which actually declined by 1.1% for the quarter and right now stand 24.5% lower compared to June 2011.
To get a sense of the market we can look at the recent earnings releases of companies in the residential property sector as well as companies that supply construction materials. Here are two:
Cedar Woods Properties (CWD) is a relatively small property developer operating in Western Australia and Victoria. Their market cap is about $281 million. Their construction projects are not limited to detached residential dwellings but include multi-unit buildings, commercial office parks, and retail space. Their specialty is mixed used developments and they are well known for planned community developments.
With such broad property exposure one would expect them to be having a tough time now and in the future. Here is how their share price has fared year over year:
Although the share price has been basically flat, you can see an upward trend beginning in May; although hardly bouyant, the property market appears to be dodging the dire predictions some experts forewarned.
Here are some key highlights from their 21 August 2012 Full Year Earnings Report:
Revenue increased 29.3% from $13.8 million in Fiscal Year 2011 to $170.4 million in FY 2012.
Net Profit after Tax (NPAT) was up 22.1% from $28.0 million in FY 2011 to $34.2 million in FY 2012.
Earnings per Share (EPS) were up 16.1% from $0.485 in FY 2011 to $0.535 in FY 2012-08-23
Dividends per Share rose 8.7% from 23 cents per share a year ago to 25 cents per share in FY 2012.
Net Bank Debt went down an impressive 93.1% from $55.1 million in FY 2011 to just $3.8 million for FY 2012.
Despite this impressive performance, total share holder return for the year declined 76.3%, from a positive 71% for FY 2011 to a negative 5.3% for FY 2012. In addition, the share price remained flat after the news, despite a positive outlook from management. The company attributed its success to a focus on growth areas, announcing property presales for 2013 of $140 million, which is $10 million above the corresponding period last year. A capital raising earlier in the year leaves them in a solid financial position to pursue new projects slated for development in 2013 and beyond.
Management expect strong demand in Western Australia driven by the resource sector. With a P/E of 7.8 and a P/EG of .68, value investors may want to learn more. RBS Australia maintained its BUY rating on CWP after the report.
Boral Limited (BLD) makes and supplies a variety of building materials across residential, commercial and industrial markets. An exposure to the US property market, makes them vulnerable to negative international sentiment.
After posting a slight rise in annual profit, Boral aims to reduce its capital expenditure this financial year.
Here is its one-year price chart:
Boral’s share price – gaining several weeks prior to the report – stalled after the release. Although Boral produced some positive numbers, its debt position was worrying and company management provided no guidance going forward. Instead, company management promised an “update” at the November annual meeting. Here are some highlights from the earnings release:
Revenue rose 6.4% to $5.01 billion in FY 2012 from $4.71 billion in FY 2011.
NPAT increased 5.3% to 176.6 million in 2012 from $167.7 million in 2011.
Long Term Debt rose from $903 million in 2011 to $1.58 billion in 2012, a 74% increase.
Boral attributed its results to declining housing starts, declining activity in non-residential construction, and too much rain in eastern Australia. The company pledged to improve its balance sheet over the next two years by selling off non-core assets and executing tighter expense controls.
TheBull has written fairly extensively on the coming boom in LNG (Liquefied Natural Gas). In the past weeks our two biggest players in the field – Santos Limited (STO) and Woodside Petroleum (WPL) reported full year results. Smaller LNG players, Oil Search Limited (OSL) and Origin Energy (ORG) also reported.
Here are the four companies with share price and market valuation data:
52 Wk Hi
52 Wk Lo
Year over Year % Change
Oil Search Ltd
All companies have exploration and production assets in oil as well as gas; Origin is also involved in electricity generation and distribution.
We begin with the largest operator in the space, Woodside Petroleum (WPL). Here is the company’s one year price chart:
After production delays and massive cost overruns Woodside got its Pluto LNG facility operational in April and the very positive quarterly production report issued in July drove the share price higher; Pluto was exceeding even Woodside’s own internal expectations. There was talk of increasing production capacity and even of a potential special dividend to reward shareholders for their patience. Then came the half-year earnings report on 21 August, 2012. A five day price chart shows how the market reacted:
Here are some highlights from the earnings release:
The company reported an 18% increase in revenue to US$2.561 billion.
NPAT fell 1.9% to US$812 million, attributable to one-off items from Pluto.
Underlying profit went up 4.5% to US$865 million.
The interim dividend increased 18% to 65 cents per share.
Operating cash flow was up 7.5% at US$1.5 billion.
The revenue included US$780 million from oil operations, which benefited from a 4% rise in the price of Brent crude in the first half as well as from increased sales. However, news about expansion at Pluto and the status of Woodside’s other LNG projects at Browse and Sunrise wasn’t really forthcoming.
Regarding expansion at Pluto, company management said: ‘We have had disappointing exploration drilling results over the past two years most recently with Ananke-1 in the Carnarvon Basin. At this point in time, we do not have sufficient discovered volumes to progress an equity gas expansion.’
In short, it appears Woodside is running out of gas. In anticipation of the need for more gas feedstock to turn over to the Pluto LNG processing facility the company has been drilling 25 wells since 2007, according to a recent article in The Australian. The article goes on to say Woodside has suspended drilling and could not say whether and when drilling might begin again.
If you have been following the LNG story you know that cost overruns are not the only concern expressed by those who question the viability of LNG expansion as a game changing event. Critics have pointed to the dwindling supply of conventional natural gas resources in Australia. Interest in unconventional sources like coal seam and shale gas is on the rise but many doubt these sources can fill the gap in a timely fashion. Woodside was betting on finding conventional gas in offshore wells and it appears they lost the gamble.
Although Woodside can negotiate with other suppliers, insufficient feedstock for its giant LNG facilities is a major cause of concern. Some analysts are worried that Woodside will not be able to acquire the natural gas needed for expansion; Credit Suisse downgraded WPL to NEUTRAL – until there’s evidence that the supply problem has been resolved.
Now we turn to Santos Ltd (STO) whose Gladstone LNG (GLNG) facility is expected to go operational in 2015. Here is the company’s one-year share price chart:
Santos share price closed on 17 August at $11.78. After digesting the results, investors bid up the share price to close at $12.06 on 22 August before falling back.
Its numbers were similar to Woodside’s figures in that underlying profit rose 20% to A$283 million while NPAT dropped 48% from A$504 million for the first half of 2011 to the current A$262 million. The number is not as dramatic as it seems as the year ago number was inflated due to asset sales during that period.
Granted, Santos showed a higher underlying profit increase than Woodside – but there appears to be other reasons why the market treated STO shares better than those of rival Woodside.
Santos is the majority partner in the Gladstone LNG project along with Malaysia’s PETRONAS and South Korea’s KOGAS. They are also a junior partner with Oil Search Limited (OSH) in the Papua New Guinea project (PNG LNG), along with Exxon/Mobil and others. Santos said its flagship $18.5 billion Gladstone LNG (GLNG) project in Queensland is on schedule to begin production in 2015.
GLNG’s costs have gone up 15% which – given the cost overruns experienced by Woodside and Chevron with their LNG projects – was not surprising. Welcome news was the announcement that part of that increase was due to the drilling of an additional 300 wells needed to ensure gas feedstock for Gladstone once it comes online.
While Woodside went looking for conventional sources of natural gas, Santos supplemented their search with unconventional gas exploration not only of gas, but oil as well. Immediately prior to the release of the half year results Santos announced they will begin selling gas from shale in October, making them the first oil and gas producer to bring an unconventionally sourced fuel to market on a commercial scale.
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