The interim profit reporting season gets busy this week, with about 80 major companies reporting results. According to AMP Capital, the season has been “reasonably good” so far: 46% of results have beaten expectations against a norm of 44%, 74% have seen profits rise from a year ago and 72% have increased dividends from a year ago. However, only about 49% have seen their share price outperform on results day – but this figure has been affected by the February mini-correction on the stock market.
The FN Arena database says 85 companies (of its 300-plus coverage universe) have reported so far, with 35% beating analyst expectations, 33% reporting in-line with projections and 32% falling short.
Citigroup finds that with 30% of results in, 42% have been in-line with expectations, 33% have fallen short, and 25% have beaten consensus.
AMP Capital says the full-year reporting season is expected to see a fall back to single digit earnings growth (after the resource driven surge seen in 2016-17) with overall earnings growth around 7% (compared to about 16% in the last financial year), with resources profit growth slowing to around 14% (from 130% in 2016-17) but still supported by solid commodity prices and production growth, bank earnings growing by about 3%, and industrials up by about 5%.
This week, top stocks reporting include Oil Search and BHP (Tuesday), Worley Parsons, Wesfarmers, Lend Lease and Fairfax (Wednesday), Qantas and Crown (Thursday) and Woolworths (Friday).
BHP (BHP)
FY18 forecast yield: 4.2%,* fully franked
Analysts’ consensus target price: $32.62
* current exchange rates: BHP reports in US$
BHP reports on Tuesday evening, and is expected to deliver first-half underlying profit of between $US4 billion–US$4.4 billion ($5.1 billion–$5.5 billion), but it will also take a US$1.8 billion ($2.3 billion) tax hit because of US President Donald Trump’s tax policies. While this is a non-cash charge, and treated as an exceptional item, it will leave a big hole in statutory interim net profit.
While BHP says it will benefit in the long run from a lower US company tax rate, it will in the short term have to revalue deferred taxes and “foreign tax credits” that it will no longer need. Of the charges, $US898 million ($1.14 billion) is related to this, while a further US$834 million ($1.06 billion) is related to tax treatment of the giant Escondida copper mine in Chile (the tax mix on which is derived from US tax rates.)
Analysts predict EPS for the first half of about 80 US cents, with a dividend in the range of 49–58 US cents. BHP is benefiting hugely from the upswing in commodity prices, which is expected to continue. Macquarie recently lifted its 2018 price forecasts for coking (steelmaking) coal by 40%, thermal coal by 30% and iron ore and manganese by 20%: incorporating these upgraded price expectations, it says earnings estimates for BHP over the next couple of years could be lifted by up to 50%.
Analysts are generally positive on BHP, but it is seen as fully valued: there is about 3.5% upside to the consensus target price.
OilSearch (OSH)
FY18 forecast yield: 1.9%,* unfranked
Analysts’ consensus target price: $8.21
*current exchange rates: OilSearch reports in US$
The Papua New Guinea-focused OilSearch (OSH) also reports on Tuesday. Analysts expect OSH to more than triple EPS in 2017, from 5.9 US cents in 2016 to 19.1 US cents, but see its full-year unfranked dividend falling by 16%, to 8.4 US cents. OilSearch posted record production for 2017, spurred by continuing outperformance by its Papua New Guinea liquefied natural gas (PNGLNG) project, and indicated that this level could be sustained in 2018.
Analysts see reasonably good value in OilSearch, with more than 10% upside to the consensus target price of $8.21, on FN Arena’s collation. Macquarie is the most positive broker on OilSearch, believing the stock will outperform despite flat production guidance for 2018 – its target price is $8.70.
Wednesday
Worley Parsons (WOR)
FY18 forecast yield: 1.5%, unfranked
Analysts’ consensus target price: $15.35
Global engineering group Worley Parsons reports half-year numbers on Wednesday, and is also expected to take a one-off charge on the back of the recently passed US tax legislation. The company has foreshadowed a charge to the group’s income tax expense of between $45 million and $60 million, which it says will not be included in underlying earnings.
The market is expecting good news from Worley Parsons, on the way to what analysts expect to be an almost five-fold lift in EPS this financial year, from 13.5 cents in FY17 to 65 cents, and a full-year dividend in the range of 20 cents–29 cents, the first payout since December 2015. As Worley Parsons returns to dividends, analysts see nice value in the stock, with 11.7% upside implied by the consensus target price
Wesfarmers (WES)
FY18 forecast yield: 5.3%, fully franked
Analysts’ consensus target price: $40.20
Wesfarmers’ first-half result will not be pretty, with write-downs of up to $1.3 billion heading shareholders’ way, mostly from the troubled Bunnings UK and Ireland (BUKI) business. Shareholders won’t be pleased, given that Wesfarmers watched arch-rival Woolworths blow up in its Masters Home Improvement experiment, and then managed its own disaster in BUKI. Wesfarmers expects BUKI to report an underlying loss before interest and tax of $165 million for the first half of the 2018 financial year. There is also likely to be a non-cash write-down of $306 million against the value of discount department store Target, on the back of lower-than-expected sales. The expected red-ink flurry has seen analysts take about 5% off full-year earnings estimates for Wesfarmers.
To rub salt in the wound, shareholders will also see that Coles, which generates about 30% of Wesfarmers’ earnings, has again slipped behind arch-rival Woolworths in the crucial Christmas period. Broker UBS believes Coles’ same-store (food and liquor) sales grew 0.6% in the December quarter, streets behind Woolworths’ same-store supermarket sales growth of 4%, which would mean Woolies has beaten Coles for the fifth consecutive quarter.
Even worse, UBS says a closely watched survey of 45 suppliers found Coles’ performance deteriorated across the board in the December half-year to levels not seen since 2009. The investment bank has cut its 2018 and 2019 profit forecasts for Coles, expecting December-half EBIT (earnings before interest and tax) to fall by 18%, and June-half EBIT to fall by 3%.
Lendlease (LLC, $15.57)
FY18 forecast yield: 4.3%
Analysts’ consensus target price: $17.89
Since announcing some problems with engineering projects in its Australian business in October, Lendlease has lost about 15% in value – but that appears to have brought the stock back into value territory.
Lendlease said underperformance on a “small number” of engineering projects in Australia would cut the earnings contribution of the company’s construction business over the six months to December below that of the same period a year earlier. Investors were unnerved by the weaker outlook for the construction business, and the stock saw a flurry of downgrades to earnings forecasts.
That’s why Wednesday’s half-year result could turn things around. Even a slightly better-than-expected result could prompt analysts to upgrade their valuation on the stock. Analysts see upside of almost 15% if the stock is to reach their consensus target price.
Fairfax Media (FXJ, 61 cents)
FY18 forecast yield: 6.2%, 85% franked
Analysts’ consensus target price: 74 cents
Media group Fairfax reports half-year figures on Wednesday, and again, any slight improvement on expectations would be welcomed by the share market. The 60% stake that Fairfax still holds in its recent spinoff, Domain, is the company’s main source of value. Recently lowered earnings estimates for Domain flowed straight into downgraded expectations for Fairfax. The company is expected to be heading for a decline in EPS in FY18, but a heft boost to its dividend.
Thursday
Qantas (QAN, $5.22)
FY18 forecast yield: 4.1%, 25% franked
Analysts’ consensus target price: $6.53
Qantas has been in the limelight recently, over whether it pays enough tax: shareholders have been reminded of what they had tried to forget, the $2.8 billion loss back in FY14. But Alan Joyce and his management team have done a superb job since then, and the carrier has guided the market to expect another strong performance in the half-year result. On Thursday Qantas expects to reveal underlying pre-tax profit of between $900 million–$950 million, a strong uplift on the $852 million earned in the same period a year ago.
The interim result will provide a pointer to whether the market’s full-year expectations are on the money: analysts’ consensus sees Qantas lifting EPS by about 27% in the year to June, and boosting its dividend by more than 50%, as revenue growth offsets higher fuel prices. There is also potential scope for capital management largesse from the airline. Qantas looks to be one of the better value prospects in the earnings season, with analysts seeing upside of more than 25% from the current price.
Crown Resorts (CWN, $12.58)
FY18 forecast yield: 4.7%
Analysts’ consensus target price: $12.83
Crown has recently sold about $700 million of assets to reduce its debt, with the offload including its Alon Las Vegas development for US$254 million ($320 million), as well as the Ellerston home base in the Hunter Valley (sold to largest shareholder James Packer’s Consolidated Press Holdings, and his sister, Gretel Packer), some Sydney apartments and its Caesars joint venture in the US. Mr Packer also bought two floors of the company’s luxury hotel-casino project at Barangaroo. Crown is also selling its 62% interest in bookmaker CrownBet to other shareholders, including CrownBet management.
Crown is still recovering from the detention of some of its staff in China last year, and the wider impact of the Chinese government’s gambling crackdown.
In December, Crown was hit by an investor class action alleging that Crown failed in its continuous disclosure obligations as an ASX-listed company, in terms of the risks it was taking in China, but also that it engaged in misleading and deceptive conduct in its public statements about the prospects in the Chinese market.
On Thursday, the market will be closely watching Crown’s result to see whether it suffers to the same extent as Sydney rival Star Entertainment Group – whose profit slumped 76% in the December half as it won less against the “international VIP” high-roller gamblers – and whether that VIP market is coming back to better health. The market knows that Crown’s earnings are going to be hit badly in FY18, but will be hoping for this grain of comfort from the interim result.
Woolworths (WOW, $27.05)
FY18 forecast yield: 3.3%, fully franked
Analysts’ consensus target price: $26.67
On Friday we hear from Woolworths, which is expected to maintain its lead in grocery sales growth, over Wesfarmers’ Coles business. Analysts are bullish on Woolworths in both running its supermarkets and building its online groceries business. A good pointer to Woolworths’ results came earlier this month from the half-year performance of Shopping Centres Australasia Property Group (SCP), which has Woolworths as its biggest tenant, accounting for 34% of its gross rent. SCP reported a 4.9% rise in funds from operations, saying it got a boost from the better performance of Woollies, in particular, the discount department store Big W. SCP lifted its full-year 2018 sales and earnings forecasts, which has the market expecting similar things from Woolworths. However, analysts believe that Woollies’ full-year performance is already built-in to the share price.
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