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The O'Brien Column: All-time record profit for BHP, growth at NAB please investors

Friday 4th August 2000

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The reaction to profit results last week from BHP and National Australia Bank (NAB) seemed to show investors on the Australian Stock Exchange can sometimes be as perverse as their New Zealand counterparts.

BHP reported an all-time record profit of $A2.03 billion, excluding abnormals, for the 13 months ended June (there was a change of balance date) but the share price fell 51Ac to $A18.50 and continued to move down, closing at $A18.25 on Monday.

NAB's profit for the nine months ended June was $A2.4 billion, 15.1% higher than the $A2.09 billion earned in the corresponding period of the previous year.

The market cut 45Ac from the share price on the day of the announcement but had restored 44Ac by Monday for a closing price of $A24.76.

The whole Australian market was down on Thursday, July 27, the day of the two announcements, after a solid decline on Wall Street. BHP and NAB were not immune.

BHP said its result was an increase of $A1.67 billion compared with the 1999 financial year and was the highest ever profit on a 12 months adjusted basis (12 months to June 2000), both before and after abnormals.

The turnaround was obviously the result of the hard-nosed approach to restructuring outlined in the previous year when the company said it would "aggressively clean up" the asset base. The same expression appeared in this year's report.

Managing director and chief executive Paul Anderson was euphoric about the latest result.

"This is a tremendous result and includes a record operating profit for the half-year ended June 30. Improvements in our performance have been delivered across the company - this result is the sum of thousands of individual actions, taken by thousands of employees, all working toward a common objective," he said.

Abnormal items of $A1.25 billion before tax ($A405 million after tax) included a pre-tax writeoff of $A794 million in the carrying value of the company's Western Australia hot briquetted iron plant, after continuing commissioning difficulties and a $A223 million loss on the sale of US west coast steel assets.

Mr Anderson admitted many of the initiatives targeted 12 months ago "did not work out" but new initiatives were undertaken.

The profit benefited from higher prices for oil and copper but Mr Anderson said the profit impact from closing non-performing operations was greater than the contribution from higher prices.

Turning around a company of BHP's size and product diversity in such a short time was a considerable feat but Mr Anderson was looking ahead to removing more costs, although the process would, perhaps paradoxically, halve costs in the current year. They would generate savings in future years.

Mr Anderson signed off with another positive, optimistic comment: "Going into 2000 we were clearly under pressure. We have now turned the corner and established momentum to take BHP to a new level of performance. Looking forward, we will face increasing pressure from globalisation and consolidation of industry sectors but I am confident we will be up to the challenge ahead."

The latest profit and the optimism should please shareholders, including the many New Zealanders who own BHP shares directly or through managed funds, given the trend in the share price.

Its low last year was $A11.42 and the price on Monday was an improvement of 59.8% on that level.

Share prices for companies such as BHP fluctuate in line with movement in commodity prices but they can benefit from internal action to rationalise assets and streamline operations and management systems.

BHP is receiving such benefits, although there was probably some pain along the way.

There are also a lot of New Zealand individuals and managed funds on the NAB share register.

They should be happy with the nine-months result, particularly as there were improvements in two key ratios, the return on average shareholders' funds and the cost to income ratio.

The former went from 17.03% in the March quarter to 17.45% for the latest quarter and the latter was 50.7% in the three months ended June, compared with 52.5% in the corresponding quarter last year.

NAB had margin pressures in the nine months period. The margin was 2.94% compared with 3.02% last year but the margin recovery in the March quarter (2.95%) from December's low of 2.92% was maintained in the June quarter.

A nine months profit of $A2.04 billion may seem large for an Australian-based company, although more than half the earnings came from international operations, but it has to be related to the bank's size. NAB had total assets of $A322.48 billion, a 12.8% increase over the figure in June last year. The former included the impact of the acquisition of MLC at the end of the period.

Assuming net profit in the final quarter is similar to that earned in the June quarter and the asset base was, say $A330 billion, the return on total assets would be 1%, the figure considered a benchmark guide for a bank's performance.

NAB's share price this week was close to the mid-point of the 2000 high of $A27.90 and the low of $A19.98.

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