The Australian December interim (half-year) profit reporting season starts to get into gear this week, but it is later in the month when the real action comes through.
Broking analysts are not looking for much joy in the season, following further downgrades made recently to earnings expectations on the back of the worsening outlook for the global economy and commodity prices, and pessimistic outlooks from the major central banks. Earnings expectations for the market deteriorated in November during a gloom annual general meeting (AGM) season – when few companies showed much optimism for the year ahead – and upgraded expectations have been few and far between.
Goldman Sachs is one of the few brokers or investment banks to give a prediction for the first-half reporting season: it expects overall earnings growth for the market of just 3.9%, the lowest since the Global Financial Crisis.
This is likely to be a precursor to a poor year for company earnings. According to the strategy team at Citi, the consensus estimates for earnings per share (EPS) growth in the 2015-16 financial year have fallen from –2% to –6% over the past two months.
Over at Morgan Stanley, the strategists expect EPS across the market to fall by 7.1% in FY16, down from a 6.1% contraction they expected at the end of 2015.
The main drag on the market is the struggling resources sector. For example, UBS sees “ongoing horrific conditions,” resulting in 2015-16 earnings falling by about 52%. That will take the broad market into earnings-downturn territory, but the investment bank says the profit growth for the rest of the market will actually be reasonable, at about 6%, led by the healthcare, building materials, general industrials and discretionary retail sectors.
EPS growth for the banks is likely to be flat in FY16: there will be slight earnings growth, but the big capital raisings of 2015 – which saw $24 billion worth of new equity raised by the big four – means that the profits have to be spread across an increased share base, cancelling much of that out at the EPS level. If the resources and financial stocks are stripped out, UBS projects the industrial stocks as delivering 5%–6% earnings growth on a capitalisation-weighted basis, and on a median basis, slightly better at 6.6%.
Share investors will be praying for no surprises from their portfolio constituents. Companies have had plenty of time to own up to the market if business conditions are deteriorating further, and the share market will be savage on any further disappointments it was not expecting.
For example, last week, labour hire and maintenance firm Programmed downgraded 2015-16 and 2016-17 earnings guidance by about 10% each (its financial year ends in March), and took a $75 million goodwill impairment. In response, Programmed’s market value was slashed 35% in a day, and the stock ended last week off 44%.
Likewise, protective equipment supplier Ansell was pummelled by 21% last week, after lowering its previous 2015-16 profit guidance of US$160 million–$183 million to a new range of US$145 million–$167 million – a 9% cut. Ansell gave a pointed warning about the danger of forecasting in the current economic and financial volatility.
However, the opposite also applies. On Friday, baby and toddler food company Bellamy’s Australia issued upgraded guidance for its interim result that significantly beat market expectation, and the share price surged by 15%.
In yield-conscious times, dividends will be very closely watched this reporting season. In particular, BHP has flagged the abandonment of its “progressive” dividend policy – under which, since 2001, it has always paid a higher dividend than in the previous period – and Commonwealth Bank’s interim result will be the first indication of the pressure on the banks either for dividends to be reduced or payout ratios wound back.
CBA reports on Wednesday February 10. Most analysts expect CBA to boost its interim dividend from the $1.98 a share it paid last year, but again, even achieving that level of dividend per share (DPS) is more difficult because of the bank’s capital raising last year. Broker CLSA says the bank would be justified in cutting the interim dividend to $1.88, to boost its capital against increased regulatory requirements and weaker earnings growth.
BHP reports its December half-year profit on February 23. BHP is expected to cut its interim dividend, and repeat the dose for the full-year: BHP’s dividend currently costs $US6.5 billion (about $9 billion) a year, and to meet that commitment this year, it would have to borrow money.
While the other major banks do not report their interim dividends until May – ANZ, National and Westpac have a September balance date, and a March half-year – analysts’ consensus collated by FN Arena expects ANZ and NAB to cut their full-year FY16 dividends, by 2.7 cents (1.5%) and 5.3 cents (2.7%) respectively.
According to a Bloomberg survey, of 85 companies in the S&P/ASX 200 index that declare dividends in February, 56 are forecast to raise dividends, 19 will maintain and 10 will cut payouts. That will leave the S&P/ASX 200 on an historic dividend yield of 5.17%, the highest in five years.
Large companies expected to increase their dividend include: CBA, Telstra, Rio Tinto, CSL, Wesfarmers, Woolworths, Brambles, AMP, Suncorp and QBE.
Large companies expected to lower their dividends include: BHP, Woodside, Westfield, Oil Search, Origin Energy, Santos, Magellan Financial, JB Hi-Fi and Independence Group.
Large companies expected to maintain their dividend include: Amcor, Ramsay Healthcare, Crown Resorts, Sonic Healthcare, Coca-Cola Amatil, Computershare, Tatts Group, Cochlear and Fortescue.
In terms of large-cap companies capable of producing a positive earnings surprise this season, UBS nominates Harvey Norman, JB Hi-Fi, Bluescope Steel, Star Entertainment Group, Wesfarmers and Qantas Airways. However, potential large-cap negative surprises include Woolworths, Coca-Cola Amatil, Insurance Australia Group (IAG) and IOOF Limited.
Citi analysts are concerned about resources and related sectors (such as Origin Energy and Worley Parsons), overseas-focused businesses (Amcor and Ansell), capital markets (Macquarie Group), consumer staples (Coca-Cola Amatil) and insurance (IAG). But the flipside is the potential for positive surprises in areas such as retail (Wesfarmers and Harvey Norman), gaming (Crown), and infrastructure (Sydney Airport).
The weaker Australian dollar will also play a major role in the reporting season. Stocks with big US sales and earnings in US dollars will see a boost to earnings: in that category are building materials suppliers Boral and James Hardie – which are benefiting from the recovery in the US housing market – as well as the medical device heavyweights Cochlear and ResMed, and financial infrastructure company Computershare.
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