Continuous Disclosure is a market news column, including analysis and opinion. Edited by Duncan Bridgeman, Tamsyn Parker and Jamie Gray.
In today's edition:
• Westpac out of favour
• Tegel's big loss
• Vodafone and MediaWorks' common thread
• Super Fund stays mum on Vodafone interest
Westpac's New Zealand business remains a strong performer for the group but across the ditch analysts have taken a dim view on the parent company's prospects, prompting a broker in New Zealand to recommend investors look elsewhere.
ASX-listed Westpac Banking Corporation posted a 22 per cent fall in its cash half year profit to A$3.29b after it took a A$896 million provision for customer remediation earlier this month.
That has prompted Deutsche Bank and UBS to issue research with a sell rating on the stock while New Zealand broker Craigs Investment Partners has told investors to reduce their exposure to banking stocks or, if they are going to invest in banks, to favour Commonwealth Bank and ANZ.
Deutsche Bank analyst Matthew Wilson says Westpac enjoyed the mortgage boom more than most with interest only loans peaking at 50 per cent of its book in the first half of 2017 now falling to 31 per cent.
At the same time Westpac's loan growth has slowed from 8 per cent to 1 per cent and its margin has dropped.
Mortgage growth is slowing and the credit quality of loans is unlikely to get any better from here, according to outlook comments from the bank.
But Wilson thinks it will be worse than that with the mortgage market shrinking 1 per cent and bad debts approaching "risk tendency" in 2020 as the mortgage cycle unravels.
"Westpac is working very hard to balance the mortgage teeter totter: maintain core profit growth and keep bad debts low."
Wilson said revenue growth looked to have "dried up" for Westpac and all divisions showed negative or anaemic growth.
"Keeping bad debts low is insurmountable in our view, and simply a function of extending too much credit into the mortgage sector. The adjustment has just begun."
Wilson is picking a A15 cents per share dividend cut.
UBS analyst Jonathan Mott is also pricing in a dividend cut of A10 cents per share from A94c to A84c in its 2020 first half result although Mott said there was an even chance of a cut in its second half 2019 result.
"We expect credit impairments to begin normalising. Further we believe potential issues arising from mortgage mis-selling and irresponsible lending are material and continue to rise as house prices fall."
Westpac isn't alone in feeling unloved by brokers. Craigs' sent out its investment view of the sector this week with a less than rosy outlook for the banks.
"The outlook for the major Australian banks has become increasingly challenged in our view, and despite recent weakness in share prices in the sector, we remain cautious.
"We expect credit growth to slow from here and margins to continue to come under pressure, while the property market remains a big risk."
"We suggest reducing exposures but prefer Commonwealth Bank and ANZ in the sector."
Auditor cries foul over Tegel accounts
Life under new ownership hasn't got any better for former NZX-listed Tegel.
In fact, the poultry group has slumped to a $43.4 million loss for the 35 weeks ended December 31, after changing its balance date and booking a $31m impairment charge.
The loss contrasts with a $26.1m profit in the 52 weeks to April 29, 2018 and comes six months after Tegel was officially taken over by Philippines poultry firm Bounty Fresh Foods following its successful $437.8m buyout bid.
In a recent filing with the Companies Office, Tegel presented financial statements that showed revenue of $429m for the 35 week period. Cost of sales came in at $356.9m for a gross profit of $72.1m.
Expenses came to $44.95m including the goodwill impairment charge, which resulted from a decrease in the performance of the group. This reduced the amount of goodwill on the balance sheet from $264m to $233m.
Auditor PwC qualified its opinion of the accounts based on its assessment that the impairment should have been recognised in the year ended 29 April 2018.
Tegel said it is working on reducing external debt with total borrowings stated as $149.7m at balance date.
On April 25 the group entered into new loan agreements with Bounty for US$33.5m which resulted in cash of $50m being received. The company said it intended to use all this cash to reduce its external bank borrowings.
The group also lodged an insurance claim of $3.2m for costs incurred as a result of cyclone Gita.
Bounty's takeover offer of $1.23 was a premium to the 82 cents the shares traded at before the offer emerged in April 2018.
However, the stock had struggled since its 2016 initial public offering when it was sold at $1.55, the lower end of the $1.50-to-$2.50 range it was seeking.
Vodafone and MediaWorks' common thread
Common ownership between Vodafone New Zealand and Mediaworks has sparked talk about whether there could be tie-ups between the companies or even a merger in the future.
Vodafone announced this week it had sold its New Zealand arm for $3.4 billio n to a 50/50 consortium involving Infratil and Canadian investment firm Brookfield Asset Management.
Brookfield also owns a majority stake (62 per cent) in Oaktree Capital - the private equity owner of MediaWorks.
New Street research analysts Ian Martin and James Ratzer described MediaWorks as a "media sector wildcard" and although its performance had improved until Oaktree's ownership there had been "frequent speculation the business was up for sale."
On the Vodafone side the analysts described its entertainment/media offering as insipid.
"Product development was formerly hitched to SkyTV, whose online/ on-demand services have not been as popular as competitors like Netflix and Spark's Lightbox.
"Vodafone's own TV service Vodafone TV, with content provided by Sky-TV, has received
negative customer reviews."
The analysts said Brookfield could bring Mediaworks into the Vodafone New Zealand fold as a source of unique streamed entertainment content.
"This would help Vodafone build a differentiated appealing bundle of products. Against this Mediaworks' strength is more radio than TV content and its TV service is Free To Air
and already widely available."
They said Vodafone's on-demand service lagged behind Free To Air market leader TVNZ.
"It is difficult to see the company investing in yet another paid TV streaming platform in what is now a crowded market."
Punkaiki fund manager Lance Wiggs said MediaWorks would have to change its business model to be more of a content aggregator - more like a Netflix or Hulu - for it to add value.
"MediaWorks is good at buying programs and Vodafone is good at shovelling them out."
But he says anything beyond that could be a stretch.
Overseas cable television companies own internet service providers, a situation which has made them powerful players.
"But I don't think you will get that situation in New Zealand," Wiggs said.
New Zealand's ultra-fast broadband is already giving people access to a wide range of content while switching internet providers was much easier here, he added.
But Richard Stubbs, Castle Point fund manager, said while he didn't have any particular insight into the relationships, both media companies and telcos were struggling with how to re-align themselves and work within the new technological environment.
"You are seeing more and more getting together and having telcos deliver content, Spark is doing it. Internationally it is far more prevalent as well.
"Therefore it would not necessarily be a surprise if a deal happened."
Matt Henry, a senior analyst at Forsyth Barr, said it was drawing too long a bow.
Henry said Brookfield's acquisition of Oaktree was a business transaction where as MediaWorks was an investment by one of Oaktree's funds.
He believed a merger was very unlikely.
Where was the Super Fund?
One question Wiggs does raise is where was the New Zealand Superannuation Fund when it came to the Vodafone deal?
The Super Fund and Infratil successfully partnered up to buy Z Energy before listing it on the stock exchange and selling down their stakes.
"Why wasn't the Super fund in this deal? Maybe Brookfield was faster. Or maybe it saw risks in the deal that the others didn't?"
A spokeswoman for the Super Fund said its policy was not to comment on whether it as or has not considered participating in an investment transaction, and in cases where we haven't proceeded, on the reasons for this.
"The reason for this is that in order to ensure prospective counterparties will be happy to work with us, it is important to be able to consider investment opportunities in confidence.
"All such discussions are therefore subject to confidentiality agreements, and we will neither confirm nor deny whether we have engaged in them. (If the fund does make a significant investment in a company we will disclose it publicly along with the rationale for our participation)."