Monthly Archives: June 2016

Dreamworld in the future

Ardent Leisure shares have again been sold down as analysts predict a 75 per cent profit plunge after this week’s Dreamworld tragedy and speculate about future implications for the embattled theme park operator.

As investigations continue into the cause of this week’s accident at the Thunder River Rapids ride, which claimed the lives of four people, investors are trying to assess the future structure of the company. Ardent had signalled before the tragedy it was moving its focus to its more lucrative event business in the United States. Preparing for this step, shareholders approved a name change from Ardent Leisure to Main Event Entertainment at the company’s emotional shareholder meeting on Thursday.

One option that the company hasn’t ruled out after the tragedy could see Ardent sell the theme park division – which includes Dreamworld and adjacent WhiteWater World on the Gold Coast – off to a private operator and exit the business.

Facing shareholders and the media at the group’s annual general meeting, outgoing chairman Neil Balnaves said that while there was no intention to sell the theme parks, it could be an option in the future.

Charge as insurance woes hit profit

AMP shares have tumbled by more than 10 per cent after it wrote down the vale of its life insurance business by $668 million and warned conditions in the industry had worsened further.

Investors sent AMP shares to $4.61 on Friday afternoon, a drop of 10.5 per cent, in response to a series of changes to shore up its troubled life insurance business.

The sell-off, which weighed on the sharemarket, took the wealth manager’s share price to its lowest level since early 2014.

It came after AMP said the challenges faced in wealth insurance over the past three years – higher-than- expected payouts and policies lapsing – had been “accentuated” in 2016.

After a detailed review, AMP formed the view that its problems were “structural,” or deep-seated, and it would write down the goodwill in its Australian life insurance business by $668 million this financial year.

“We’ve seen consistent deterioration in the insurance sector over the course of 2016,” AMP Chief Executive Officer Craig Meller said in the statement. “Today’s actions are designed to re-set the wealth protection business.”

The company also announced a reinsurance deal with one of the world’s largest reinsurers, Munich Re, to cover 50 per cent of $750 million of annual premium income as it seeks to “reduce the magnitude of earnings volatility” and release an estimated $500 million in capital.

The deal is expected to cut the unit’s annual profits by $25 million from fiscal 2017, AMP said in a statement Friday.

AMP is among insurers struggling in an industry facing rising claims, policy lapses and low investment returns. Insurers’ revenue fell 36 per cent to $28 billion in the year to June 30 from a year earlier, acording data from the Australian Prudential Regulation Authority.

AMP expects to book around $500 million in capital losses and one-off items and the wealth protection business’s embedded value will fall by $1 billion in the year to December 31, according to the statement. The division’s profit margins are expected to decline by about $65 million in the 2017 financial year, it said.

The impairment charges won’t impact AMP’s fiscal 2016 underlying profit, according to the statement. The company’s dividend policy of paying out 70 per cent to 90 per cent of underlying profits remains unchanged.

AMP’s tie-up with Munich Re “de-risks the company to some extent,” although the insurer’s future earnings remain a “black box” amid ongoing claims issues across the life industry, said David Walker, who helps oversee $600 million at Clime Asset Management in Sydney. “AMP’s share price has done nothing for nearly seven years,” said Walker, who doesn’t own the stock. “But the company’s still not cheap enough for us to invest in.”

The expectations in first quarter

Same-store sales, excluding new stores, grew 0.7 per cent in the 14 weeks to October 2. This was higher than analyst expectations and Woolworths’ first rise in same-store sales since 2015.

Chief executive Brad Banducci said:  “We’ve been seeing gradual, consistent improvement in our business since May. There’s no one thing we can look at, we’re just a little bit better every week.”

Woolworths has cut prices by about $1 billion in recent quarters, driving increased store traffic and transaction numbers. But Mr Banducci said Woolworths was shifting its focus from price to fresh products and product range, as recommended by former Aldi executive Paul Foley.

Mr Banducci said it was “hard to get clean read” on Australia’s $90 billion grocery market, which is becoming more competitive as Woolies and No. 2 chain Coles cut prices, and foreign chains Aldi and Costco expand.

“There is some indication of the two-speed economy, it’s very hard for us to be precise given our price investment,” he said.

“In terms of Aldi’s entry into South Australia and Western Australia … they’re having an impact in those economies. We’ve been impacted but we’ve not been impacted to the extent we had expected or budgeted.”

Rival Wesfarmers was dumped by investors this week after lower-than-expected growth for its Coles supermarkets.

Deutsche Bank analyst Michael Simotas told clients Woolworths’ sales update was “positive … particularly in the context of the Wesfarmers’ release earlier in the week” and contained “no major surprises except for [discount department store] Big W, which was worse than expected”.

“Interestingly, items per basket are still falling with improvement driven by transaction growth,” he said. “Items per basket is probably an easier problem to fix than lack of customers, but a drag nonetheless.”

The last time Woolworths reported, in August, it posted its first loss as a listed company, driven by its disastrous foray into home improvement, Masters, plus troubles in supermarkets and Big W.

Friday’s results also highlighted continued bleeding from Big W, and Woolworths has forecast operating earnings will not rise from last year’s. Same-store sales were down 5.7 per cent year-on-year, due to lower-than-expected clothing sales.

Former fund manager Peter Morgan, who owns some Woolworths stock, cautioned the company’s turnaround would take time. Woolworths has said it will take three to five years.

“You can’t turn big ships around quickly,” Mr Morgan said. “Woolworths has only been down and out for six to 12 months, really.

“It’s still got a competitive environment. I don’t think [rival] Coles is going to lay down. And the bigger issue, longer term, is what happens online in the marketplace.”