Many of Australia’s top brokers have been busy adjusting their financial models again, leading to the release of a large number of broker notes this week.

Three broker buy ratings that have caught my eye are summarised below. Here’s why brokers think these ASX shares are in the buy zone:

Pilbara Minerals Ltd (ASX: PLS)

According to a note out of Macquarie, its analysts have retained their outperform rating and $1.50 price target on this lithium miner’s shares. This follows the announcement of a potential joint venture with Calix Ltd (ASX: CXL) which is exploring the possibility of the construction of a facility that will process spodumene into a mid-stream lithium product. In addition, the company has revealed that it will soon make a decision on whether to restart the Ngungaju plant or the Altura project. The Pilbara Minerals share price is currently fetching $1.22.

Suncorp Group Ltd (ASX: SUN)

Analysts at UBS have retained their buy rating and lifted their price target on this insurance and banking giant’s shares to $12.00. According to the note, the broker was pleased with Suncorp’s general insurance update and its target of achieving margins of 10% to 12% by FY 2023. And while it expects the majority of the improvement to come late on, the broker still believes its shares look cheap at the current level. The Suncorp share price is trading at $10.44 today.

Woolworths Group Ltd (ASX: WOW)

A note out of Macquarie reveals that its analysts have retained their outperform rating and $44.50 price target on this retail conglomerate’s shares. This follows confirmation that the company will be going ahead with its Endeavour demerger. Macquarie expects the spin off to materially improve its balance sheet, given that the majority of its debt has historically been with the drinks unit. This will be supportive of up to $2 billion in capital returns. Overall, it believes Woolworths has become a more attractive business. The Woolworths share price is trading at $40.83 this morning.

More reading

• How the Woolworths (ASX:WOW) share price has withstood today’s market selloff
• Suncorp (ASX:SUN) share price hits a 52-week high: Can it go higher?
• Why Adore Beauty, APN Property, Boral, & Calix shares are pushing higher
• Woolworths (ASX:WOW) share price higher on PFD acquisition news
• Pilbara Minerals (ASX:PLS) share price lower despite joint venture news

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Woolworths Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The CSR Limited (ASX: CSR) share price has pushed 6.26% higher to $6.28 following the release of the company’s full-year results. In earlier trade, CSR shares gained more than 8% to reach a new, all-time high before partially retreating.

Let’s take a look at how the company has been performing.

CSR full year results highlights 

The CSR share price is higher following a well rounded result with a 17% increase in statutory net profit after tax (NPAT) to $146.1 million. 

This result was driven by strong cost control and operational efficiency out of the company’s building products division, which accounted for 70% of group earnings before interest and taxes (EBIT). Building products experienced an 8% uplift in EBIT to $184.3 million with EBIT margins increasing from 10.7% to 12.0%. 

The improvement in margins helped the business offset the impact of slowdown in residential construction activity, which declined 4% during the year.

Elsewhere, CSR’s property division delivered an EBIT of $54.2 million following the completion of the next stage at the Horsley Park industrial development. The company further secured $146 million in sale proceeds over the next three years for Horsley Park developments. 

Finally, the company’s aluminium division saw EBIT slide from $59.6 million to $23.4 million, or roughly 9% of group EBIT following a sharp decline in aluminium prices at the start of the financial year. 

CSR declared a final dividend of 14.5 cents per share, lifting its full year dividend to 23.0 cents per share. The company also announced a special dividend of 9.5 cents per share following the settlement of the property sale at Horsley Park. This compares to the previous year where no final dividend was declared due to the priorities placed on preserving cash amidst COVID-19. 

Management commentary 

CSR managing director and CEO Julie Coates commented on the result, saying: 

CSR performed very well during the year, reflecting the breadth of our businesses and strength of our offering across diverse construction segments and markets. We increased our earnings with a strong focus on cost control and operational efficiency which leveraged trading outcomes as residential building activity improved during the second half of the year

The pleasing result was achieved while making important changes to reorganise the Building Products business. We are now well positioned to deliver our strategy across more complete customer solutions, optimising our supply chain and leveraging core capabilities across all products and markets. This will further diversify our business, enabling us to maximise market opportunities and drive future growth

CSR share price cruises to record highs 

The CSR share price has been performing well and is up by more than 50% since September last year. The bullishness behind the building industry has helped the company’s shares clear previous 2018 highs to set a new all-time record high of $6.40 in intraday trading today. 

More reading

• Why CSR, Fonterra, Nearmap, & Pro Medicus shares are dropping

Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The InvoCare Limited (ASX: IVC) share price is trading lower on Wednesday morning.

At the time of writing, the funerals company’s shares are down over 1.5% to $10.59.

This latest decline means the InvoCare share price is now down over 8% since the start of the year.

Why is the InvoCare share price trading lower today?

Investors have been selling InvoCare’s shares following the release of an update this morning.

That update provided colour on current trading conditions, its expectations for the future, and its new strategy.

In respect to trading conditions, in the near term, management notes that underlying growth remains in the low single digits. As a result, it will require a focus on services and adjacencies to grow its addressable market and operating leverage in order to deliver satisfactory returns.

It does, however, believe the longer-term outlook is more positive due to Australia’s growing and ageing population.

Strategy reset

InvoCare revealed that it is resetting its strategy so it can better leverage its core assets. This will result in a shift in its business focus to simplify, standardise, and control costs. It will also see InvoCare seek to prioritise “share of value” and profitable growth instead of volume market share.

This follows underwhelming results from its previous Protect and Grow strategy. Since its launch in February 2017, the InvoCare share price has lost approximately a fifth of its value.

Whereas over the same period, the S&P/ASX 200 Index (ASX: XJO) has gained around 24%.

The company also spoke about new growth opportunities. These include new product developments such as “Green memorialisation”, digital engagement, business to business opportunities, the expansion of its cremator network, entering new territories, and property options.

It also sees opportunities in the pet cremations market following its recent acquisition. Management notes that pet ownership rates continue to grow, the humanisation of pets is increasing, and the industry is highly fragmented.

Overall, management appears positive on its long term prospects. Though, based on the InvoCare share price performance today, it appears that some investors aren’t as confident that the new strategy will be enough to turn things around.

More reading

• Top broker picks ASX shares next in line for a profit upgrade
• These are the 10 most shorted shares on the ASX

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended InvoCare Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Federal Treasurer Josh Frydenberg unleashed a wave of new spending last night that will likely give several ASX shares a nice boost.

If you haven’t already heard, spending is the new fiscal conservatism!

While many of the details from the 2021 federal budget has been leaked, Frydenberg still pulled a few rabbits out of the hat.

Never mind that the massive spend will punch a $161 billion hole in the budget this year. It’s all about keeping our economy on the path to COVID-19 recovery.

ASX shares to get slice of the multi-billion cash handout

ASX investors won’t be complaining either. Many of the billions of dollars that the government is throwing around will flow into the market.

One of the surprise spending initiatives that Frydenberg unveiled last night is the one-year extension of the instant asset write-off scheme.

It’s estimated that 99% of Australian companies will benefit. They can purchase capital equipment and immediately deduct that from the current year’s tax bill and there’s no cap.

Tax breaks in 2021 Federal Budget to boost ASX shares

ASX companies that sell capital equipment are likely to be grinning from ear to ear. These include auto accessories groups like the ARB Corporation Limited (ASX: ARB) share price and car yards like Eagers Automotive Ltd (ASX: APE) share price.

Another tax break extension is the $1080 tax credit for low- and middle-income singles. Any tax savings are likely to be spent by this group.

I won’t be surprised if the Harvey Norman Holdings Limited (ASX: HVN) share price gets a second government sponsored support from the initiative after the retailer refused to hand back its Jobkeeper payments.

Stimulus for innovation and technology

Another surprise was the Patent Box. Companies that develop local patented innovations will only have to pay a tax rate of 17% on income earned from that technology.

The biotech industry has been calling for such a program for years, and I believe the CSL Limited (ASX: CSL) share price and Starpharma Holdings Limited (ASX: SPL) share price could benefit from this.

ASX miners could also get a piece of the action. It’s worth pointing out that the better-than-expected budget position is due to high commodity prices. And while there is no specific handout to this sector, the government’s new $1.6 billion funding for priority energy technologies, which include batteries, will add demand for copper and other base metals.

Not that ASX miners like the OZ Minerals Limited (ASX: OZL) share price and IGO Ltd (ASX: IGO) share price need any help. These shares are trading near record or multi-year highs.

Other ways the 2021 budget could flood the ASX

Then there are also changes that will encourage Aussies to put more cash into their superannuation. A good chunk of that retirement savings are likely to find its way into the market too.

Throw in the $15 billion in new funding for infrastructure, $1.7 billion for childcare and $2.1 billion extra for aviation and tourism. You can see how widespread the benefits to ASX shares could be.

One has to wonder how much extra pressure on inflation the 2021 federal budget will put on the economy though.

More reading

• Is the CSL (ASX:CSL) share price a clear buy?
• 2 fantastic ASX 50 shares that could be in the buy zone
• Starpharma (ASX:SPL) share price slides despite COVID spray rugby deal
• IGO (ASX:IGO) share price on watch as new gold drilling joint venture announced
• The ASX miners caught in the FOMO trade as copper smashed record highs

Brendon Lau owns shares of CSL Ltd., IGO Ltd, and OZ Minerals Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. and Starpharma Holdings Limited. The Motley Fool Australia has recommended ARB Limited and Starpharma Holdings Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

In a widely expected move, the Food and Drug Administration has expanded its emergency use authorization for Pfizer (NYSE: PFE) and BioNTech‘s (NASDAQ: BNTX) COVID-19 vaccine to include people as young as 12 years old.

The widened authorization for BNT162b2 was based on the ability of the vaccine to induce the production of COVID-19 antibodies; the levels of antibodies it generated in clinical trial participants ages 12 through 15 were at least as good as the antibody levels in participants in the 16-to-25 age range.

Those antibodies appear to protect patients from being infected by the coronavirus.

Measured starting one week after they received their second doses of BNT162b2, none of the 1,005 adolescents who were inoculated developed COVID-19. Among the 978 trial participants who received placebo shots, there were 16 cases of COVID-19. That equates to a finding of 100% protection, although the numbers in the study were relatively small.

The side effect profile for the adolescents was similar to that seen in those 16 and older. In both groups, people had more side effects after the second dose than the first dose.

Pfizer and BioNTech beat Moderna (NASDAQ: MRNA) to the finish line in terms of gaining FDA authorization for their vaccine to be administered to adolescents. However, BNT162b2’s period of exclusivity in that demographic, which presumably will only last for a couple of months, isn’t likely to be much of a financial advantage. Large sales contracts with the U.S. government are already in place for both mRNA vaccines, so opening the use of BNT162b2 to a wider age group won’t increase its sales. Until another vaccine is authorized for adolescents, some of Pfizer’s doses will be used for adolescents, and any supply tightening that might cause for the adult demographic will be filled by Moderna’s vaccine or Johnson & Johnson’s.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• If Pfizer’s vaccine is a winner, why did this analyst downgrade its stock?
• Moderna just made the Pfizer vaccine’s biggest weakness an even bigger one
• Only 40% of Australians want the AstraZeneca vaccine. What could this mean for CSL (ASX:CSL)?
• 4 healthcare share tips from a fundie with a health PhD
• Why the CSL (ASX:CSL) share price has rebounded 13% since March

Brian Orelli, PhD has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Johnson & Johnson and Moderna Inc. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The Electro Optic Systems Hldg Ltd (ASX: EOS) share price is on the move on Wednesday.

At the time of writing, the communications, defence, and space company’s shares are up 15% to $4.60.

Why is the Electro Optic Systems share price rising?

Investors have been buying Electro Optic Systems shares this morning following the release of a trading update.

According to the release, the company has achieved a significant cash inflow as its investment in inventory converts to cash.

The release explains that from March 2020 to March 2021, Electro Optic Systems increased its investment in its inventory of finished goods to a total $138 million. This was to allow production to continue against a firm export order while delivery and payment processes were restored from COVID-19 disruption.

Positively, this investment preserved the Electro Optic Systems supply chain and maintained its own production processes.

As a result, on 30 April 2021, Electro Optic Systems was able to report that all deliveries were “proceeding normally”.

Current cash balance

At the end of March, the company’s cash balance stood at $41.5 million.

Since then, cash in-flows have been $43 million, of which $30 million has come from the export contract that had been disrupted by COVID-19 for 12 months. The funds that were paid to Electro Optic Systems were drawn under an international letter of credit which fully covers this entire contract, through a major Australian bank.

Pleasingly, Electro Optic Systems continues to produce and deliver against this contract.

After the recent payment of $30 million, the company still has over $100 million in value of completed goods positioned at the customer’s location ready for handover. And with delivery and acceptance processes now operating normally, management anticipates further cash receipts of over $100 million from this business during the fourth quarter of 2021.

Prior to today, the Electro Optic Systems share price was down 33% since the start of the year. So, today’s gain will no doubt be a big relief for shareholders.

More reading

• Why the Electro Optic (ASX: EOS) share price is plunging 5%
• The War in Afghanistan is ending. Which ASX companies supply our military?

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Electro Optic Systems Holdings Limited. The Motley Fool Australia has recommended Electro Optic Systems Holdings Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Shares of Twitter (NYSE: TWTR) are down over 20% since its latest earnings release as investors reacted to the company’s first-quarter report. While the company marginally beat analysts’ estimates on the bottom line, results for key metrics like revenue and monetizable daily active user (mDAU) growth were on the sluggish side. 

Earlier this year, Twitter laid out plans to double its $3.7 billion in 2020 revenue to $7.5 billion annually by the end of 2023 and to grow monetizable users by at least 60%. Despite a 19.6% sequential decline in revenue last quarter, the company says these plans remain on track, but it appears investors aren’t buying it. 

Ambitious targets

For Twitter to reach its 2023 revenue goal, it needs to add about $1.27 billion of revenue per year in 2021, 2022, and 2023.

Metric	2018	2019	2020
Annual revenue (billions)	$3.04	$3.46	$3.72
Year-over-year change	24.5%	13.7%	7.4%

Data source: Company Filings. 

The reality of the company’s historical revenue growth doesn’t exactly meet these lofty expectations, having added just $417 million in 2019 and $257 million last year. Not only is this far below what Twitter needs, but growth also appears to be decelerating.

More to the point, first-quarter revenue fell to $1.04 billion, down from $1.29 billion in the fourth quarter of 2020, a near 20% contraction. Twitter is starting the year on the back foot in dollar terms, and it seems unlikely to grow as much as necessary to satisfy its long-term target — this year, anyway. However, this figure did represent a 28% increase over the year-ago quarter, so the door remains open if it can seriously outperform in the remainder of 2021.

Monetizable daily active user growth was slightly more favorable. The metric grew 4% quarter on quarter and 20% year over year. However, only 306 million users will result from 4% sequential growth from now until the end of 2023, less than the 315 million the company projects. That changes if the company maintains its year-over-year trajectory, but that will be a very high hurdle due to tough comparisons in 2020 and the ongoing economic reopening.

The results so far suggest Twitter may be well short of the ambitious pitch it made to investors in February, and that is a big reason the stock fell so sharply after earnings day. If mDAU growth stops decelerating, it might reach the user target, but any sluggish quarters would put an end to the discussion.

Valuation versus (a lack of) earnings

At approximately $52 per share as of this writing, Twitter trades at a market value of $42 billion. This would be fairly reasonable based on 2019 earnings of $1.87 per share as it would represent a price-to-earnings multiple of about 28 times. But the company failed to deliver a similar result in 2020, instead losing $1.44 per share and leaving investor hopes pinned on the ambitious guidance discussed above.

Twitter falls right in the middle of two key social media competitors: Facebook, which trades at roughly 30 times 2020 earnings while continuing to grow its bottom line, and Snap, which repeatedly fails to deliver full-year earnings and instead trades at a rich 30 times 2020 revenue.

Twitter sits at a more reasonable 11 times 2020 revenue. 

Given the effects of the pandemic and Twitter’s ability to manage them to deliver revenue and user growth in 2020, investors likely believed the company would carry the momentum into the new year — as the share price certainly reflected. However, after digesting the first-quarter results, it’s clear Twitter’s medium-term targets might be set a little too high. 

For the company to steady the ship, it will need to sustain its user growth and monetize them quickly to support the top-line expansion needed to double revenue in just a few years. Otherwise, the stock could be set for a period of underperformance relative to the broad market.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• ‘It makes me nervous’: Expert worried about ‘crazy’ market
• Here’s why Microsoft just spent $19.7 billion to acquire nuance communications

Anthony Di Pizio has no position in any of the stocks mentioned. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Facebook and Twitter. The Motley Fool Australia has recommended Facebook. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The Carsales.Com Ltd (ASX: CAR) share price won’t be going anywhere on Wednesday.

This morning the auto listings company requested a trading halt so that it could undertake an equity raising.

Why is Carsales raising funds?

According to the release, Carsales has entered into a Securities Purchase Agreement to acquire a 49% stake in United States-based business Trader Interactive for approximately US$624 million (A$800 million).

This values Trader Interactive on a 100% enterprise value (EV) basis at US$1,625 million or approximately A$2,074 million, which represents a calendar year 2020 EV/adjusted EBITDA acquisition multiple of 26.5x.

Management notes that the acquisition represents a strategically compelling opportunity to further build out its international scale and industry diversification with exposure to attractive verticals in the United States. It is expected to be earnings per share positive on a pro-forma basis, with mid-single digit earnings per share accretion from year one.

The company also has a call option to acquire the remaining interest in Trader Interactive on specified (but unreleased) terms.

To fund the acquisition, Carsales is looking to raise $600 million via a pro rata accelerated renounceable entitlement offer with retail rights trading. The entitlement offer will be conducted at $17.00 per new share, which represents a 12.9% discount to its last closing price of $19.51.

The balance will be funded by the upsize of its existing debt facility from existing lenders.

What is Trader Interactive?

The release explains that Trader Interactive is a leading platform of branded marketplaces in the US.

It provides digital marketing solutions and services across commercial truck, recreational vehicle (RV), powersports, and equipment industries.

The business generated adjusted revenue of US$123 million and adjusted EBITDA of US$61 million in 2020.

Management notes that it has a strong track record of delivering earnings growth, with an EBITDA compound annual growth rate of 13% over the last five years.

“An important milestone”

Carsales’ Managing Director and CEO, Cameron McIntyre, said: “Having held Australian market leading positions in bikes, boats, caravans (RVs) and truck marketplaces since 2005, the company has developed strong intellectual property and product & technology capabilities that can be leveraged into global markets.”

“We have demonstrated an ability to build valuable international partnerships over many years in our automotive business and see this acquisition as an important milestone in carsales’ international and vertical marketplace expansion. It also represents a significant investment to support our long-term growth.”

“This acquisition is expected to accelerate our international growth strategy by providing us with exposure to a significant market in the United States across attractive non-automotive verticals. We are excited by the opportunity this investment provides carsales and look forward to working closely with Trader Interactive in helping them achieve their objectives and delivering shareholder value,” he concluded.

Trading update

Carsales also provided a brief trading update with the acquisition announcement. 

On the top line, Carsales is expecting to deliver a 3% to 4% increase in revenue in FY 2021 to $433 million to $437 million.

And thanks to margin improvements, adjusted net profit is expected to grow 8% to 11% to the range of $149 million to $153 million.

When will the Carsales share price return to trade?

The Carsales share price could be out of action until the start of next week. It has requested that the trading halt remains in place until the earlier of an announcement being made about the completion of the institutional component of the entitlement offer or the commencement of trading on Monday 17 May 2021.

More reading

• Service Stream (ASX:SSM) share price sinks to new 52-week low
• Commonwealth Bank (ASX:CBA) share price in focus following Q3 results
• How has the end of JobKeeper hit recovering Australian businesses?
• Does the NAB (ASX:NAB) share price offer a 7% dividend yield?
• Pushpay (ASX:PPH) share price on watch after FY 2021 results

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended carsales.com Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Service Stream Limited (ASX: SSM) share price sank to a new 52-week low on Tuesday. Shares in the Aussie network service provider fell 4.1% to close at $0.94 per share. That’s the lowest level in the last 12 months as the company’s tough start to the year continues.

Why is the Service Stream share price under pressure?

Service Stream has been sliding in value this year and closed with a $402.2 million market capitalisation on Tuesday afternoon. It means the Service Stream share price has now slumped 56.5% in the last 12 months in a tough period for shareholders.

A soft half-year financial result in February saw shares in the utilities and telecommunications company fall 20 per cent in one day. Service Stream’s earnings reported a 17.7% drop in revenue to $409.9 million. That saw group profits fall 40.5% as the company booked a $16.2 million net profit after tax.

A 37.5% dividend cut to 2.5 cents per share didn’t help matters as investors sold down. The coronavirus pandemic has disrupted asset construction, operations and maintenance and impacted negatively on the group’s financials.

That has been reflected in the Service Stream share price woes in 2021. Yesterday saw the broader Aussie share market get smashed as investors got spooked by recent highs, as well as concerns over heightened inflation and higher interest rates.

The S&P/ASX 200 Index (ASX: XJO) closed 1.1% lower at 7,097.00 points on Tuesday. The Service Stream share price was caught in the carnage and sank lower, albeit it is no longer inside the ASX 200. That was despite no new announcements from the company since 14 April and having traded ex-dividend on 25 March 2021.

The current 52-week low is tough for investors to swallow after recent losses. However, management did provide some hope in its February half-year result. Service Stream noted a “strong pipeline of organic growth opportunities” with a view to developing long-term performance.

More reading

• Commonwealth Bank (ASX:CBA) share price in focus following Q3 results
• How has the end of JobKeeper hit recovering Australian businesses?
• Does the NAB (ASX:NAB) share price offer a 7% dividend yield?
• Pushpay (ASX:PPH) share price on watch after FY 2021 results
• LIVE COVERAGE: ASX expected to fall; Pushpay reports growth

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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All eyes will be on the Commonwealth Bank of Australia (ASX: CBA) share price on Wednesday.

This follows the release of the banking giant’s third quarter update this morning.

How did Commonwealth Bank perform in the third quarter?

For the three months ended 31 March, Commonwealth Bank reported an unaudited statutory net profit after tax of $2.4 billion.

The company’s cash net profit after tax also came in at $2.4 billion, which represents a 24% increase over the quarterly average recorded during the first half of FY 2021.

Management advised that this was driven largely by lower loan impairment expenses and a 2% increase in income. The latter was the result of above system core volume growth, improved margins, and higher non-interest income.

Commonwealth Bank’s loan impairment expense was significantly lower in the quarter as an improved economic outlook resulted in a reduction in collective provisioning levels. Nevertheless, management advised that provision coverage remains strong and continues to reflect a cautious approach to managing risks as the economic recovery from COVID-19 continues.

The bank’s expenses increased 1% for the quarter excluding remediation costs and 2% including them. This reflects a stronger investment spend profile and higher volume related costs, partly offset by the benefits of ongoing business simplification and two fewer days in the quarter.

This ultimately led to Commonwealth Bank finishing the period with a customer deposit funding ratio of 75% and a CET1 ratio of 12.7%. The latter was up 10 basis points for the quarter despite the payment of its interim dividend during the period.

In light of this surplus capital position, management notes that it creates flexibility for the Board to consider capital management initiatives. However, the timing and extent of any such initiatives is dependent upon a continued trend of domestic economic improvement, its ongoing assessment of portfolio credit quality, and regulatory guidance. This could potentially give the Commonwealth Bank share price a boost today.

Management commentary

Commonwealth Bank’s Chief Executive Officer, Matt Comyn, was pleased with the quarter.

He said: “The Bank remains well placed to support our customers and the broader community as the economic recovery from COVID-19 continues. Our disciplined focus on operational excellence was reflected in continued strong operational performance in the March quarter. This was highlighted by strong home loan funding volumes, particularly through our proprietary network, and business lending continuing to grow at greater than three times system levels.”

Credit quality across our lending portfolios remained sound. While it is pleasing to see that the vast majority of customers have smoothly transitioned from the Bank’s COVID-19 temporary loan repayment deferral program as it concluded in March, we continue to offer ongoing assistance to those in need.”

“Capital and balance sheet strength were maintained, with our CET1 ratio up 10 bpts to 12.7% notwithstanding $2.7 billion (-59 basis points of CET1) in 1H21 interim dividend payments to ~880,000 shareholders. We have made good progress on our strategic agenda and looking ahead, we will continue to focus on differentiating our proposition through reimagined products and services to build tomorrow’s bank today for our customers,” he concluded.

The Commonwealth Bank share price is up 13% year to date. Shareholders will no doubt be hoping that today’s update is enough to extend these gains today.

More reading

• Here are the US shares ASX investors were buying last week
• ASX 200 shares hit all-time high! How did we get here?
• Commonwealth Bank (ASX:CBA) unveils yet another partnership
• Commonwealth Bank (ASX:CBA) share price hits record high. Here’s why
• ASX 200 Weekly Wrap: Bank shares push ASX 200 towards all-time high

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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