<h5>Agriculture/Hotels/Restaurants/Electricity/Gas/Water</h5>

<h3>The Edge Billion Dollar Club 2017</h3>

(Oct 23): As was the case in last year’s Billion Dollar Club awards, the three sectors of agriculture, hotels and restaurants, and electricity, gas and water do not have enough billion-dollar companies to stand on their own. The exercise of comparing the companies in this motley group, therefore, has its limitations.

Electricity and gas delivery business <strong>AusNet Services</strong> came out on top, delivering both the highest annualised return and net profit growth over the last three years. This may have been driven by the earnings spike the company enjoyed in FY2016 ended March 31, following one-off tax benefits. However, the stock may have also attracted more investor interest as management pursues a new growth strategy to diversify into renewables and energy services.

Formerly known as SP AusNet, the company claims to be the largest energy delivery service in Victoria, Australia. It owns and operates about A$11 billion ($11.7 billion) worth of gas and electricity network assets, and serves 1.3 million customers. AusNet also has a non-regulated commercial energy services arm, which provides niche utility and intelligence services. The company is backed by other Asian utilities providers – Singapore Power and the State Grid Corp of China, which control 31.1% and 19.9% of the company respectively. It has a dual listing in Australia and Singapore.

In FY2016, AusNet’s earnings soared more than 20-fold y-o-y to A$489.3 million on a 4.6% rise in revenue to A$1.9 billion. This was mainly because the company restructured its triple stapled security structure into a single entity that year. It also settled its disputes with the Australian Tax Office over intellectual property deductions between 1998 and 2011. Both developments contributed A$163.1 million in one-off tax benefits.

Since then, the outlook has become slightly more challenging, owing to new government regulations. Australia’s new metering price regime under the Electricity Distribution Price Review for 2016 to 2020 has dampened AusNet’s top line, leading to a 2% y-o-y revenue dip for FY2017. Its earnings declined 47.9% y-o-y to A$255.1 million.

To counter these challenges, AusNet is moving towards combining traditional electricity distribution with renewable energy sources such as rooftop solar panels. In April last year, the company launched a new five-year strategy, Focus 2021, to cut costs and raise efficiency. According to the roadmap, AusNet will expand its commercial energy services with the aim of growing its contracted energy infrastructure base to A$1 billion by 2021. It is also exploring new business models in the non-regulated energy space as the regulated component of its business faces headwinds.

While generating good returns, AusNet has also rewarded its shareholders with consistent dividends. For FY2017, it declared a dividend of 9.8 Australian cents a share. This comprises an interim dividend of 4.4 Australian cents a share and a final dividend of 5.4 Australian cents a share. The latter includes a special dividend of one Australian cent a share. This is an increase from FY2016 and FY2015, when AusNet paid total dividends of 8.8 and 8.7 Australian cents a share, respectively.

<strong>Strong ROE for agriculture amid price volatility</strong><br>The agriculture businesses have seen weak share price returns, with figures in negative territory. Earnings have also been muted for the palm oil producers, given the depressed prices of crude palm oil (CPO) and palm kernel (PK) in 2015.

For instance, <strong>First Resources</strong>, which manages plantations in the Indonesian provinces of Riau and Kalimantan, saw earnings decline 37.8% to US$107.9 million in FY2015 ended Dec 31. This was attributed primarily to low CPO prices. Its peer<strong> Bumitama Agri</strong>, which operates in the same provinces, saw earnings for FY2015 ended Dec 31 fall 22.8% to IDR713.7 billion.

With CPO prices up 6.2% the next year, however, both companies have since seen a drastic turnaround in earnings. In FY2016, First Resources’ earnings rose 31.1% to US$125.4 million ($169.9 million), thanks to higher CPO and PK prices as well as greater sales volumes. Meanwhile, Bumitama’s earnings rose 40.8% to IDR1 trillion ($100.4 million) as higher commodity prices offset a slight reduction in production volumes. The company also expanded its diversification into biodiesel, with the segment contributing to 4.7% of Bumitama’s revenue for the year.

Significant headwinds remain for the sector. First Resources reported this year that it had been hit by weak demand from China and India, with the latter’s overall trade flows affected by the demonetisation exercise. Dry weather caused by the El Niño phenomenon, the strongest since the late 1990s, also lowered industry production numbers by 15% last year. Similarly, Bumitama saw production of fresh fruit bunches shrink 4.6%.

Bumitama has generally maintained a higher return on equity than First Resources, and it scored the highest on ROE among the companies in the three sectors. However, it also has a higher gearing ratio of 0.6 times for FY2016, compared with 0.2 times for First Resources.

While palm oil plays have done poorly over the last three years, analysts seem optimistic about agribusiness stocks. In an Oct 10 report, CIMB Research analyst Ivy Ng maintained her “add” call on First Resources with a price target of $2.32. Ng likes the company’s superior output growth prospects, when compared with its peers, as well as its low cost of production.

<strong>Hospitality hit by soft demand, currency moves</strong><br>The hotels sector, too, has faced headwinds in the last three years amid a glut in hotel rooms and soft corporate demand. Hospitality giant <strong>Shangri-La Asia </strong>had the lowest score in the earnings category, with a three-year annualised net profit decline of 35.3%. The company owns 76 hotels, over half of them in China, and also engages in property rental, hotel management services and property sales. It has a primary listing in Hong Kong and a secondary listing in Singapore.

In FY2016 ended Dec 31, Shangri-La’s earnings slumped 24.3% to US$106.1 million. Revenue declined 3.2% to US$2.06 billion. The drop in revenue was driven by the weakening of several operating currencies against the US dollar. Earnings were weighed down by the property rental segment, owing to major renovations to the China World Trade Centre in Beijing and start-up costs for its new properties in China, Myanmar and Mongolia. Properties in Myanmar and Mongolia also suffered low occupancy rates.

Another luxury hotel business owner, <strong>Mandarin Oriental International</strong>, has also seen a fall in earnings. The company, a member of the Jardine Matheson Group, owns 30 hotels and eight residences across 20 countries. It has a standard listing in London and secondary listings in Bermuda and Singapore.

In FY2016 ended Dec 31, Mandarin Oriental’s earnings dropped 38.2% y-o-y to US$55.2 million. Revenue fell 1.6% to US$597.4 million. This was attributed to persistent weak demand in key markets such as Hong Kong, London and Paris. Significantly, the company’s revenue per available room for Europe was down 15% on a like-forlike basis. This weak outlook has continued into the current financial year. For 1HFY2017, earnings fell 34% y-o-y to US$15 million, owing to ongoing renovation of its London hotel.

However, both companies have fared slightly better in their returns. The share price of Mandarin Oriental surged 38% in June on news that it was conducting a strategic review of a hotel. The Excelsior Hong Kong had been suffering from low occupancy rates and Mandarin Oriental had received several bids for the property.

Shares in Mandarin Oriental have since fallen after the company announced that the bids failed to meet its expectations, but the stock is still up 75.5% this year. The company says it will continue to review its options.

Shares in Shangri-La have risen over 70% since September last year, following the installation of a new CEO: Lim Beng Chee, former CEO of CapitaLand Mall Asia.

According to an Aug 28 report by Bloomberg Intelligence, currency and geopolitical risks are likely to continue dragging Shangri-La’s earnings for FY2017. Its earnings from China properties are also likely to be “squeezed by a weak yen and lower yields”, the report said. Likewise, in commentary accompanying its FY2016 results, Mandarin Oriental chairman Ben Keswick says challenging market conditions are likely to continue.<br>

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AusNet has high stock returns, earnings; plantation companies show high ROEs

AusNet has high stock returns, earnings; plantation companies show high ROEs

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