In Week 3 of reporting season, we can expect coronavirus (excuse me, COVID-19) to be much more prominent. This is because we will hear outlook statements from some of the companies most exposed to a China slowdown. To say that the market will be listening closely is an understatement.
On Tuesday (after the market closes), we will see half-year numbers from BHP. In terms of earnings, the market is expecting about US$5 billion–US$5.5 billion ($7.5 billion–$8.2 billion), with underlying earnings (EBITDA) of about US$12.5 billion ($18.7 billion). The iron ore operations should contribute about 60% of that EBITDA figure.
Last year, BHP reported a half-year profit of US$4 billion ($5.7 billion), with an interim fully franked dividend of 55 US cents (77.2 cents). Some brokers (notably Macquarie) think BHP’s interim dividend payment could surprise on the upside – and there is even a possibly of the mining giant returning additional capital to shareholders through a special dividend.
BHP has been viewed recently as a yield stock, and that view still holds: on FY20 expectations, Thomson Reuters has the stock at a 5.7% fully franked prospective yield (grossed-up, 8.2%), and for FY21, expectations imply a 5.3% yield (grossed-up, 7.5%). FN Arena expects 5.2% (grossed-up, 7.4%) for FY20 and 4.9% (grossed-up, 7%) for FY20.
Importantly for yield-focused investors, BHP, at $38.65, is still seen as holding its own, price-wise: FN Arena gives an analysts’ consensus valuation for the stock of $39.577, while Thomson Reuters has $39.10.
BHP is benefiting from iron ore prices that are still quite buoyant, on the back of the difficulties being experienced at big Brazilian miner Vale, as it deals with the continued fallout from its tailings-dam disaster in January 2019. That accident knocked out almost one-quarter of Vale’s initial 2019 production target of 400 million tonnes (an amount equivalent to around 6% of the entire annual global seaborne iron-ore market). That – combined with much smaller supply curtailments from the Australian miners because of tropical cyclones – helped to push iron ore above US$125 a tonne by mid-2019, more than double where it started the year.
While Vale struggles to get back fully online, it recently said it would export 7% less than expected in the first quarter of 2020, and has signalled that it will require everything to go right to achieve its full-year iron ore targets, of up to 340-355 Mt.
Those issues have helped iron ore recover from US$70 in November, to US$88 at present. Over the medium-term, analysts expect the seaborne iron ore market to return to over-supply, with benchmark (62% iron) prices retracing to the low US$60s. But for the present, BHP is raking it in.
But after the reported half-year numbers, BHP will have plenty to tell the market about the situation in China in its outlook statement.
Chinese demand for commodities such as iron ore, coal and copper is expected to slump on the back of industrial and transport shutdowns forced by the Coronavirus. BHP has already been negotiating with Chinese customers to delay shipments. We know that the Chinese economy will take a big hit from the epidemic: investment bank JP Morgan says that China’s economy will grow at a pace of just 1% in the first quarter, versus an initial expectation of a 6.3% growth rate. Although the Vale effect is holding up iron ore prices, BHP will have more to tell the market about what it expects to see unfold in China.
Ditto for Fortescue Metals Group when it reports half-year results on Wednesday. Fortescue is the Australian miner most exposed to a downturn in China: it makes 93% of its sales there, and it only produces iron ore.
On consensus, the market is expecting underlying profit of about US$1.9 billion–US$2 billion, compared to US$1.6 billion a year ago. Last year Fortescue paid a 19-cent interim dividend, as well as a special dividend of 11 cents a share.
Fortescue has already released impressive production numbers for the December 2019 half-year, with a record 88.6 million tonnes shipped during the half, at a production cost below US$13 per wet metric tonne (wmt). Based on this performance, Fortescue said it expects full-year production to come in at the upper end of its guided range of 170 million tonnes–175 million tonnes, and cash-cost guidance is lowered to a range of US$12.75–US$13.25 per wmt.
These sorts of numbers are the reason why the market expects full-year Fortescue profit to rise by about 28% for the full-year FY20, enabling a dividend rise of about one-third, to US$1.51. On that basis, at the present exchange rate (67 US cents to A$1), Fortescue trades on a prospective dividend yield of 20.4% – fully franked.
However, this level of largesse is unlikely to be sustainable, given the expectation that iron ore prices decline significantly – on FN Arena’s consensus collation, the expected FY21 dividend from Fortescue comes down to 61 US cents, a prospective yield (at today’s exchange rate) of 8.3% fully franked. Many income-oriented investors would be happy to take that – but they must understand that they would bear capital risk to do so, given that analysts’ consensus valuations for FMG are well below the current share price of $10.99 – at $9.64 (FN Arena) and $8.96 (Thomson Reuters).
Again, the outlook statement on how Chinese demand is likely to play out will be a critical part of the market’s reaction.
On Thursday, Qantas Airways (half-year) and Sydney Airport (full-year 2019) report, and both results will carry plenty of importance for what they say about China.
The market expects first-half profit for Qantas to come in at about $580 million, compared to $498 million a year ago. Qantas has not yet talked about the impact of coronavirus on its operations, but the stock has lost 12% so far in 2019, which tells you that the market thinks it is affected. Analysts have reduced their earnings per share (EPS) forecasts, to account for both the Coronavirus outbreak and the expected effects of the bushfires on Australian tourism (international accounts for 40% of Qantas’ revenue, versus 35% for domestic).
But longer-term, Qantas’ plans to fly directly from the east coast of Australia to New York and London – its “Project Sunrise” – will have a bigger effect on the company’s earnings. Unless the outlook statement takes a pessimistic turn, analysts expect EPS and dividend rises from Qantas for the full-year: at the present share price of $6.43, both FN Arena and Thomson Reuters project a consensus expected dividend yield of 4.2% (grossed-up, 6%) for FY20, rising to 4.4% (grossed-up. 6.2%) for FY21.
And given the share price performance this year, the outlook is for recovery: Thomson Reuters has an analysts’ consensus valuation for QAN of $7.35, while FN Arena posts $7.41.
Sydney Airport (SYD) brings out full-year (calendar 2019) numbers on Thursday. The market expects EPS growth of about 5% (FN Arena)–9% (Thomson Reuters), with dividend expectations of 39 cents, compared to 37.5 cents in 2018.
China is Sydney Airport’s largest international source market: the airport recorded 1.23 million Chinese residents flying inbound in the 12 months to June 2019, 7% of the total. Over the same period Australian outbound travel to China through the airport rose by 5%, to 604,000 residents, or 4% of the total – the number three outbound destination.
This traffic will take a hit from the Coronavirus – and the bushfires – and SYD’s outlook on this situation will be scrutinised.
SYD is a stalwart of yield portfolios, despite having an unfranked dividend: on present analysts’ expectations, SYD at $8.58 offers a 4.7% yield in 2020. To obtain that yield, capital risk appears to be present, with Thomson Reuters showing analysts’ consensus valuation for SYD of $8.30, while FN Arena’s figure is $8.14.
On Thursday, Crown Resorts (CWN) will report first-half numbers, which will certainly show an impact from Coronavirus.
CWN has been pummelled since late last year, when the NSW Independent Liquor and Gaming Authority announced an inquiry into Laurence Ho’s Melco Resorts & Entertainment buying a 19.99% stake in Crown from James Packer – the Hong Kong-based company walked away from the deal earlier this month, blaming the Coronavirus outbreak, both in terms of the effect on tourism and the decision by authorities to shut casinos in Macau. Melco will retain its existing 10% stake in Crown, but now the focus moves to the epidemic’s impact on CWN’s properties.
Revenue from foreign VIP gamblers – including “high rollers” from China – is crucial to Crown at its two (soon to be three) Australian casinos – there is also a smaller one in London. The company was already dealing with softer economic conditions in China and a crackdown from Beijing on conspicuous consumption: last year, turnover from foreign VIP gamblers fell by 26%, flowing through to a 28% slide in full-year net profit, to $401.8 million.
The market is expecting first-half net profit of about $186 million, versus $194 million a year ago. At the current share price of $11.80, Crown comes with an estimated FY20 yield of 5.1%, 42.5% franked (grossed-up, 6%) – with analysts’ consensus valuations of $12.49 (Thomson Reuters) and $12.21 (FN Arena). But there is a definite degree of nervousness over the result, and the company’s outlook.
Other popular stocks reporting this week include:
Coca-Cola Amatil (CCL, $11.91) – Thursday
Full-year December 2019
Market expecting net profit of about $380 million–$390 million, compared to $430.4 million in 2018
FY20 estimated yield: 4%, 28% franked (grossed-up, 4.4%)
Analysts’ consensus valuation: $9.90 (Thomson Reuters), $10.83 (FN Arena)
Tabcorp (TAH, $4.65) – Wednesday
First-half December 2019
Market expecting net profit of about $215 million, compared to $182.5 million last year
FY20 estimated yield: 4.7%, fully franked (grossed-up, 6.8%)
Analysts’ consensus valuation: $4.91 (Thomson Reuters), $4.93 (FN Arena)
Coles (COL, $16.98) – Tuesday
First-half December 2019
Market expecting net profit of about $426 million, versus $381 million last year
FY20 estimated yield: 3.3%, fully franked (grossed-up, 4.7%)
Analysts’ consensus valuation: $16.00 (Thomson Reuters), $15.06 (FN Arena)
Earlier this month, Coles reported stronger-than-expected sales over the Christmas period, with the retail giant telling investors to expect bigger profits for the first half of the financial year.
Wesfarmers (WES, $45.43) – Wednesday
First-half December 2019
Market expecting net profit of just under $1.1 billion, compared to $1.08 billion (normalised) last year – after Wesfarmers divested Coles, its coal operations, Quadrant Energy and Kmart Tyre and Auto businesses
FY20 estimated yield: 3.4%, fully franked (grossed-up, 4.8%)
Analysts’ consensus valuation: $37.50 (Thomson Reuters), $37.37 (FN Arena)
Domino’s Pizza (DMP, $58.31) – Wednesday
First-half December 2019
Market expecting net profit of about $78 million, compared to $68.2 million last year
FY20 estimated yield: 2.2%, 86.4 franked (grossed-up, 3%)
Analysts’ consensus valuation: $49.30 (Thomson Reuters), $48.43 (FN Arena)
WiseTech Global (WTC, $29.07 – Wednesday
First-half December 2019
Market expecting net profit of about $36 million, compared to $23.1 million last year
FY20 estimated yield: 0.2%, fully franked (grossed-up, 0.25%)
Analysts’ consensus valuation: $27.35 (Thomson Reuters), $30.00 (FN Arena)
Origin Energy (ORG, $7.81) – Thursday
First-half December 2019
Market expecting net profit of about $540 million, compared to $592 million last year
FY20 estimated yield: 4.3%, fully franked (grossed-up, 6.2%)
Analysts’ consensus valuation: $8.90 (Thomson Reuters), $8.78 (FN Arena)
Santos (STO, $8.14) – Thursday
Full-year December 2019
Market expecting net profit of about US$860 million, compared to US$630 million last year
FY20 estimated yield: 2.4%, fully franked (grossed-up, 3.4%)
Analysts’ consensus valuation: $9.01 (Thomson Reuters), $8.78 (FN Arena)
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