Earnings season wrap: BHP exercises good cost control

Nicholas Grove/Glenn Freeman | 27/02/2017

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Matthew Hodge: The result itself was little bit softer than forecast, but no doubt a significant improvement on the previous year. And really that's a function of couple of things but really mainly higher commodity prices as everyone knows. They have also done a pretty good job of controlling costs and pull quite a significant amount of costs out of the business. There's probably less of that to go in future. That's kind of the way BHP is now and with prices where they are at obviously making pretty good money. There are questions around the sustainability of that and EBITDA margins interestingly were as high as they have been since the peak of the China boom.

Fortescue, their result was pretty much as expected. They've done a really good job of pulling costs out and the iron ore price has been just phenomenal for them. So, it's really helping them pay down debts. So, their balance sheet was really a sore point two or three years ago, and it's becoming on a sound footing, but the sustainability of this level of earnings particularly when they are exposed to iron ore, is the real question. You've got the iron ore prices trading well above the support from the cost curve at the moment, and we don't think that's going to continue.

Johannes Faul: So, Woolworths reported its interim results on Wednesday. Key points to take note of in our view were around the supermarket business, which accounts for over 65 per cent of group EBIT in the half. The big surprise to the market was the strength and momentum of sales growth that outgrew the market and in particularly outgrew Coles. That strong sales growth was very well received by the market and the stock was up significantly on the day.

The other interesting data point however in our view was that EBIT margins for the supermarket business declined from 5.2 per cent to 4.3 per cent half on half. In our view, long-term EBIT margins for the group sit around 4 per cent. So, only 30 basis points lower from where Woolworths currently sits and this is due to our view on the competitive environment. We'll see a response from Coles in terms of price cuts, which means Coles will try to regain market share it has lost. Also, a second competitor called Aldi is expected to continue aggressively rolling out its stores over the near term, over the next four or five years and capture market share.

So, given the competitive pressures on the top line, and likely price cuts from Coles which might also lead to further price cutting from Woolworths, we've been taking a cautious stance on the supermarket industry in Australia.

This report appeared on www.morningstar.com.au 2017 Morningstar Australasia Pty Limited

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