Reporting Season Highlights – Week 2

We recap some of the profit reporting season highlights from the second week including Bendigo and Adelaide Bank (BEN), Domino’s Pizza (DMP) and Integrated Research (IRI).

BEN’s FY20 key result components are: (1) statutory underlying NPAT (i.e. excluding specific items) $193m (BP $316m, consensus $245m), -49% pcp; (2) cash NPAT $302m (BP $322m, consensus $313m), -27% pcp; (3) cash EPS 60¢ (BP 64¢, consensus 61¢), -30% pcp; (4) final ordinary dividend deferred (BP nil, consensus 3¢); (5) cash ROE 5.4% (BP 5.8%, consensus 5.4%); (6) NIM 1.96% (BP 1.95%); (7) credit expense $169m/26bp GLA (BP $174m/29bp); and (8) CET1 ratio 9.3% (BP 9.8%).

Cash NPAT was 27% pcp lower at $302m despite 3% pcp higher net interest income, with the key drags being sub-system business lending growth, 8% pcp lower noninterest income (impacted by COVID-19, commissions and management fees impacted by the sale of Bendigo Financial Planning), 7% pcp higher costs (higher staff costs related to residential and agribusiness initiatives, AASB 16 impact and higher IT consulting costs) and a material increase in credit expenses mainly for a further COVID-19 overlay. Having generated a statutory profit of $47m in 2H20 (9¢ statutory EPS), BEN could have paid a token final dividend of 4¢ under APRA’s dividend payout rules. While the decision to defer this dividend reflects ongoing COVID-19/economic uncertainties, we believe the prudent move also reflects BEN’s desire to conserve capital given its lower than sector average CET1 ratio of 9.25% (although bear in mind this is still within its 9.0-9.5% target range).

We have lowered FY21 cash NPAT by 6% largely due to higher operating (as per guidance of flat underlying costs) and credit expenses (ongoing COVID-19 impacts in our view) more than offsetting higher volume-driven NII. Post FY21, our cash NPAT changes are not material although forecast dividends are increased to allow payout ratios to track closer to the 60-80% target range. Our $7.00 price target and Hold rating are unchanged.

DMP announced underlying FY20 NPAT (post-AASB16) of $145.5m, in line vs BPe $144.6m. Same store sales (SSS) increased +5.8% (cycling +3.6%), with online sales lifting +21.4% and accounting for 72.1% of total sales. Key result highlights include:

• Notwithstanding COVID-19 disruption (including temporary closure of stores in France), Europe EBITDA finished flat vs pcp with SSS up +2.8% (cycling +3.1%). DMP estimate COVID-19 reduced EBITDA by ~$18.1m (implying normalised growth of ~24%). Germany again led the region benefiting from a focus on a single brand. After an initial lull period, store openings has resumed with an expected catch-up in FY21.
• Japan SSS lifted +18.4% (cycling +8.4%) reflecting growth in delivery & carry-out albeit materially buoyed by the pandemic in 4Q20. SSS continues to be underpinned by new customer growth & additional frequency (i.e. traffic volume rather than ticket value). This growing customer base has provided DMP foundation to increase its store network target to 1,500 (+500) by 2032. 74 stores were opened in FY20.
• ANZ SSS were up +5.1% (cycling +2.4%) although EBITDA dipped -5.8% due to additional store support & temporary store closures relating to COVID-19. DMP est. COVID-19 reduced EBITDA by -$14.8m (adding back would imply normalised growth of ~5% vs pcp).
• SSS growth continues to show positive momentum in all regions. Group SSS in the first 7 weeks of 1H21 is up +11.0% (cycling +4.7%) with total network sales lifting 18.5% vs pcp. So far 24 new stores have opened.

We believe DMP has significant long-term growth prospects, with Europe, Japan and acquisitions the major drivers. We retain our Buy rating and increase our PT to $96.50 (previously $62.40).

FY20 NPAT grew 10% to $24.1m which was in line with our forecast of $24.0m and at the upper end of the $23.6-24.2m guidance range. Revenue grew 10% to $110.9m which was 1% ahead of our forecast of $110.0m and also at the upper end of the $109.5-111.0m guidance range. The consistent growth in both revenue and NPAT implied a consistent NPAT margin of 21.7%. Operating cash flow grew 14% to $24.2m and was consistent with NPAT so represented good cash flow conversion. Only notable difference to our forecasts was the final dividend was flat at 3.75c fully franked whereas we had forecast a 7% increase to 4.0c.

Integrated did not provide any FY21 guidance but it is not the company’s policy to provide forward guidance. Somewhat surprising, however, was the lack of any outlook statements in the presentation though on the conference call the CEO John Ruthven did say the pipeline for FY21 is stronger than it was for FY20.

We have modestly downgraded our FY21 and FY22 EPS forecasts by 2% and 5%. The downgrades have been driven by increases in our amortisation forecasts on the back of new products being released to market this half. There is little change in our revenue forecasts and we continue to forecast high single digit top line growth for the next two years. We also forecast some NPAT margin improvement in each period.

We have updated each valuation we use in the determination of our price target for the earnings changes as well as market movements and time creep. We have also increased the discount we apply in the relative valuations from 10% to 15% given the likely weighting to the second half in the FY21 result though there are no changes to our key assumptions in the DCF. The net result is no change in our PT to $4.25 which is a modest premium to the share price so we maintain our HOLD recommendation.

To learn more about these stocks, speak to your adviser or refer to the Client Access Research Library.

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