Although a few companies have jumped the gun, this week marks the formal start of the main earnings season, when companies with a June year-end – the majority – report their results for the financial year 2015-16 (FY16), and companies with a December year-end report their interim (half-year) results.
After the downgrades that have been announced by companies (or made by analyst in their forecasts) since the last reporting season in February, companies do not have much scope to disappoint the market. According to one of the leading results-watchers in the Australian market, Shane Oliver, head of investment strategy and chief economist at AMP Capital, consensus expectations for 2015-16 earnings expect an 8% decline in profits across the market, driven by a 50% fall in resources earnings and a 2% fall in bank profits, leaving profits in the rest of the market up just 1%.
Other readings of consensus forecasts predict a 10% profit decline across the board, so 8 – 10% is virtually locked-in.
While the performance of the overall market (the S&P/ASX 200 stocks) will be down, investment bank UBS expects the typical (median) stock to record earnings per share (EPS) growth of about 3%: excluding the resources stocks, this rises to about 5%. UBS says EPS growth expectations for the median stock in FY17 sit around 7%.
Oliver expects the main “themes” to be: improved conditions for resources companies following a stabilisation in the iron ore and oil price; constrained revenue growth for industrials (although improved business conditions, according the NAB business survey may help); ongoing cost-cutting; continuing headwinds for the banks; and an ongoing focus on dividends. He says sectors likely to see good profit growth are discretionary retail, industrials, gaming and healthcare.
The “confession season” that preceded the earnings season – in which companies alert the market to any expected variance on their previous guidance (or analysts’ estimates) – showed that the market can be pretty savage on companies trading at high multiples who disappoint.
For example, toiletries maker Asaleo Care admitted to problems in June, cutting its profit guidance, and the shares promptly plunged 30%. The Sorbent owner announced a 23% fall in first-half earnings and said it now anticipated a 15% fall in underlying profit, compared to prior guidance that the result would be steady on last year’s $76.1 million. The news caught the market by surprise, given that Asaleo had restated its confidence in the forecast as recently as its annual general meeting on April 26. But market conditions deteriorated in June.
In two weeks, Asaleo fell 40%, from $2.29 to $1.36, slumping below its issue of $1.65 a share in mid-2014.
To be fair, profit reassessments can also go the other way: last month, BlueScope Steel announced its second profit upgrade in the space of two months, revealing that earnings before interest and tax (EBIT) for the June half would be $340 million, well above the previous estimate of $270 million provided in late May. The upgrade means that the expectation for underlying earnings for the six months to June 30 have climbed 62% since February, when the company first provided guidance for the period. BlueScope shares rose 33% in July.
But Asaleo Care is an example of the entire market: priced at a level where, if not exactly priced for perfection, certainly not prepared to be surprised by a much lower profit figure than expecting.
The benchmark S&P/ASX 200 Index trades on a forward price/earnings (P/E) multiple of 16.3 times earnings, against a long-term average of about 14 times. Excluding the financial sector stocks, the index is trading at close to 20 times estimated 12-month earnings – again, a significant premium to its long-term average.
One of the major potential sources of disappointment could be the banks, although only Commonwealth Bank reports in detail during this season: Westpac, ANZ and National Australia Bank have a September year-end and will only release quarterly cash profits. Outlooks from the banks have steadily become less upbeat and bad and doubtful debts have been rising, albeit from historic lows, and tougher capital rules are pressuring dividends.
Any investor who still regards bank dividends as sacrosanct should think again. ANZ gave a clear indication of the pressure banks are under when it cut its interim dividend by 7%, to 80 cents, after first-half cash earnings fell by 24%. The other members of the “big four” kept their payouts flat – which may come to be seen as about the best they can do in the current environment. At least one major Australian institutional investor, Perpetual, has warned that the banks are materially over-paying dividends, and investors should not assume this will continue.
UBS says potential positive surprises among the companies reporting include Adairs, Harvey Norman, NEXTDC, Orora, Pact Group Holdings, SKYCITY Entertainment Group, Star Entertainment Group, Tabcorp Holdings and Webjet.
Potential negative surprises include Coca Cola Amatil, Cochlear, CSL, Insurance Australia Group, Invocare, Monadelphous Group, Navitas, Sims Metal Management and Woolworths.
Here’s what the market thinks of the prospects for the top 20 stocks by market capitalisation, as collated by FN Arena. The financial year-end is June 30 unless otherwise stated.
CBA (CBA)
FY16 EPS change: –1.9% to 550.2 cents
FY16 DPS change: +0.4% to 421.5 cents
FY17 EPS change: +1% to 555.5 cents
FY17 DPS change: +0.2% to 422.4 cents
Westpac (WBC), year-end September 30
FY16 EPS change: –7.6% to 236.9 cents
FY16 DPS change: +1.1% to 189.1 cents
FY17 EPS change: +3.5% to 245.1 cents
FY17 DPS change: +0.6% to 190.2 cents
ANZ (ANZ), year-end September 30
FY16 EPS change: –21.9% to 212.1 cents
FY16 DPS change: –9.8% to 163.3 cents
FY17 EPS change: +11.4% to 236.2 cents
FY17 DPS change: +0.7% to 164.4 cents
Telstra (TLS)
FY16 EPS change: –8.8% to 34.3 cents
FY16 DPS change: +3.9% to 31.7 cents
FY17 EPS change: +5% to 36 cents
FY17 DPS change: +1.6% to 32.2 cents
National Australia Bank (NAB), year-end September 30
FY16 EPS change: –4.4% to 241.5 cents
FY16 DPS change: –1.4% to 195.2 cents
FY17 EPS change: –2.2% to 236.3 cents
FY17 DPS change: –4.6% to 186.3 cents
BHP Billiton (BHP) (reports in US$)
FY16 EPS change: –84.7% to 5.5 US cents
FY16 DPS change: –77.3% to 28.2 US cents
FY17 EPS change: +772.7% to 48 US cents
FY17 DPS change: +18.1% to 33.3 US cents
CSL (CSL) (reports in US$)
FY16 EPS change: –8.9% to 266.2 US cents
FY16 DPS change: –6.9% to 115.4 US cents
FY17 EPS change: +19.5% to 318 US cents
FY17 DPS change: +24.5% to 143.7 US cents
Wesfarmers (WES)
FY16 EPS change: –4.4% to 206.5 cents
FY16 DPS change: –5.3% to 189.4 cents
FY17 EPS change: +13% to 233.4 cents
FY17 DPS change: +6.2% to 201.1 cents
Woolworths (WOW)
FY16 EPS change: –47.1% to 90.3 cents
FY16 DPS change: –41.2% to 81.7 cents
FY17 EPS change: +32.2% to 119.4 cents
FY17 DPS change: +3.2% to 84.3 cents
Scentre Group (SCG)
FY16 EPS change: +0.1% to 22.6 cents
FY16 DPS change: +0.5% to 21 cents
FY17 EPS change: +5.8% to 23.9 cents
FY17 DPS change: +3.8% to 21.8 cents
Transurban (TCL)
FY16 EPS change: from –9.5 cents in FY15 to 16.3 cents
FY16 DPS change: +14.3% to 45.7 cents
FY17 EPS change: +42.9% to 23.3 cents
FY17 DPS change: +9.6% to 50.1 cents
Macquarie Group (MQG), year-end March 31
FY17 EPS change: –8.9% to 596.7 cents
FY17 DPS change: –1.1% to 395.7 cents
FY18 EPS change: +2.6% to 612.2 cents
FY18 DPS change: +4.2% to 412.5 cents
Woodside Petroleum (WPL), year-end December 31 (US$)
FY16 EPS change: +3,170% to 98.1 US cents
FY16 DPS change: –35.5% to 70.3 US cents
FY17 EPS change: +15.2% to 113 US cents
FY17 DPS change: +20.8% to 84.9 US cents
Westfield (WFD), year-end December 31
FY16 EPS change: –39.5% to 46.3 cents
FY16 DPS change: –1.6% to 34.1 cents
FY17 EPS change: +8.8% to 50.4 cents
FY17 DPS change: +2% to 34.8 cents
(Thomson Reuters estimates)
Brambles (BXB) (reports in US$)
FY16 EPS change: +6.8% to 42.4 US cents
FY16 DPS change: –5.7% to 26.4 US cents
FY17 EPS change: +8% to 45.8 US cents
FY17 DPS change: +6.8% to 28.2 US cents
Rio Tinto (RIO), year end December 31 (reports in US$)
FY16 EPS change: from –47.5 cents in FY15 to 178.2 US cents
FY16 DPS change: –50.5% to 106.4 US cents
FY17 EPS change: –0.6% to 177.2 US cents
FY17 DPS change: –3.5% to 102.7 US cents
Newcrest (NCM)
FY16 EPS change: –32.9% to 47.8 cents
FY16 DPS change: from no dividend in FY15 to 6.7 cents
FY17 EPS change: +98.3% to 94.8 cents
FY17 DPS change: +153.7% to 17 cents
Amcor (AMC) (reports in US$)
FY16 EPS change: –29.6% to 39.4 US cents
FY16 DPS change: –26.8% to 38.8 US cents
FY17 EPS change: +37.8% to 54.3 US cents
FY17 DPS change: +13.7% to 44.1 US cents
Suncorp (SUN)
FY16 EPS change: –2.3% to 86.6 cents
FY16 DPS change: –9.7% to 68.4 cents
FY17 EPS change: +8.8% to 94.2 cents
FY17 DPS change: +9.8% to 75.3 cents
AMP (AMP), year-end December 31
FY16 EPS change: +6.6% to 35.5 cents
FY16 DPS change: +6.1% to 29.7 cents
FY17 EPS change: +8.5% to 38.5 cents
FY17 DPS change: +7.7% to 32 cents
This week
Here’s a look at expectations for major companies reporting this week:
Tuesday 2 August
BC Iron (BCI)
FY16 EPS change: from –59.9 cents in FY15 to –17.2 cents
FY16 DPS change: from 15 cents in FY15 to nil cents
FY17 EPS change: from–17.2 cents in FY16 to 1.9 cents
FY17 DPS change: no dividend expected
Credit Corp (CCP)
FY16 EPS change: +14.5% to 95 cents
FY16 DPS change: +9.1% to 48 cents
FY17 EPS change: +10.5% to 105 cents
FY17 DPS change: +10.4% to 53 cents
Genworth Mortgage Insurance Australia (GMA) – half-year report
FY16 EPS change: +23.2% to 43.5 cents
FY16 DPS change: +31.3% to 34.8 cents
FY17 EPS change: –8.5% to 39.8 cents
FY17 DPS change: –8.3% to 31.9 cents
GPT Metro Office Fund (GMF)
FY16 EPS change: –44.5% to 16.2 cents
FY16 DPS change: +51.7% to 15.4 cents
FY17 EPS change: +2.5% to 16.6 cents
FY17 DPS change: +2.6% to 15.8 cents
Navitas (NVT)
FY16 EPS change: +31.4% to 25.1 cents
FY16 DPS change: +2.1% to 19.9 cents
FY17 EPS change: –2% to 24.6 cents
FY17 DPS change: +0.5% to 20 cents
Wednesday 3 August
Rio Tinto – half-year report
Prices for iron ore, thermal coal and alumina have surged 45%, 26% and 22% respectively over the past six months, and analysts have responded by upgrading their full-year earnings forecasts for Rio by more than 20% in recent months. The company’s iron ore exports from Western Australia were lower than analysts had expected in the June quarter, putting the miner further under pressure to achieve its full-year target, but the half-year earnings report should not show any major unexpected surprises.
Thursday 4 August
BWP Trust (BWP)
FY16 EPS change: –28.4% to 23.5 cents
FY16 DPS change: +6.1% to 16.8 cents
FY17 EPS change: –26.8% to 17.2 cents
FY17 DPS change: +2.4% to 17.2 cents
Downer EDI (DOW)
FY16 EPS change: –13.6% to 40.9 cents
FY16 DPS change: +1.3% to 24.3 cents
FY17 EPS change: –8.3% to 37.5 cents
FY17 DPS change: –7% to 22.6 cents
Suncorp Group (SUN)
FY16 EPS change: –2.3% to 86.6 cents
FY16 DPS change: –9.7% to 68.4 cents
FY17 EPS change: +8.8% to 94.2 cents
FY17 DPS change: +9.8% to 75.3 cents
Tabcorp Holdings (TAH)
FY16 EPS change: –50% to 21.2 cents
FY16 DPS change: +11.5% to 22.3 cents
FY17 EPS change: +12.3% to 23.8 cents
FY17 DPS change: +13% to 25.2 cents
Friday 5 August
Virgin Australia Holdings (VAH)
FY16 EPS change: from –3.2 cents in FY15 to –1.1 cents
FY16 DPS change: steady on nil
FY17 EPS change: from –1.1 cents in FY16 to 2 cents
FY17 DPS change: steady on nil
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