The December 2019 reporting season is in its last full week – according to AMP Capital, 55% of companies have seen their profits rise from a year ago, which is below the long-term norm of 65%. Downside surprise, at 40% of companies, is running ahead of above upside surprise of 38%. Only 53% of companies have now raised dividends, which is below the long-term norm of 62%.
AMP Capital says the market’s full-year FY20 earnings growth expectations are still around 2.8% for the overall market, which is in line with expectations at the start of the reporting season.
On Tuesday, technology star Appen (APX) reports full-year numbers. The artificial intelligence services supplier is one of the so-called “WAAAX” group of tech stocks – namely WiseTech Global, Afterpay Touch, Appen, Altium and Xero – that have surged in value over the last few years, and which are major constituents of the Australian tech index, the S&P/ASX All Technology Index, which launched last week.
The Appen share price has more than doubled every year for five years – it boasts a five-year total return of 108% per year. On analysts’ consensus expectations and price targets, Appen could be one of the buys of the reporting season. For the December 2019 calendar year, the market expects net profit of about $65 million, compared to $49 million last year. This follows the company’s upgrade to EBITDA (earnings before interest, tax, depreciation and amortisation) expectations, made in November.
On Thomson Reuters’ analysts’ consensus, APX is trading at a 2019 (December) estimated P/E ratio of 49.6 times earnings, and 36.3 times expected 2021 earnings – still high, but to a market grappling with Appen’s growth prospects, becoming more manageable. On analysts’ consensus valuations, APX has plenty of scope for growth: Thomson Reuters posts a consensus valuation of $29.04, while FN Arena is looking for $29.00. There is a yield, but no-one is buying Appen for dividends: the 2019 dividend is expected to come in at 10 cents a share, giving a yield of 0.4%, 57.8% franked (grossed-up, 0.5%).
TUESDAY also includes:
Blackmores (BKL, $71.55)
First-half December 2019
Market expects about $21 million, down from $34 million
FY21 estimated yield: 2.7%, fully franked (grossed-up, 3.9%)
Analysts’ consensus valuation: $67.00 (Thomson Reuters), $66.04 (FN Arena)
Vitamin supplement company Blackmores (BKL) reports first-half results on Tuesday, and it won’t be pretty – selling into China, Blackmores is a coronavirus (Covid-19)-affected stock. A fortnight ago, Blackmores slashed its full-year profit outlook because of coronavirus disruptions and the costs of manufacturing changes: the company now expects a net profit of between $17 million–$21 million for FY20, compared to $53 million in FY19. The 2.7% dividend yield on offer does not compensate for a still-overvalued stock.
Caltex Australia (CTX, $34.51)
(Full-year December 2019)
Market expects about $330 million, compared to $553 million last year
FY20 estimated yield: 3.3%, fully franked (grossed-up, 4.7%)
Analysts’ consensus valuation: $34.50 (Thomson Reuters), $34.75 (FN Arena)
There will not be much joy for Caltex Australia shareholders in terms of profit, with a 40% slide in the offing. But CTX shareholders find themselves in one of the potentially nicest situations on the share market – a full-blown takeover battle for their stock. British based fuel retailer EG Group and Canadian suitor Alimentation Couche-Tard are in a takeover tussle for the stock. The Couche-Tard offer is currently at $35.25 per share. EG will have to come back with a higher bid (the EG offer also includes shares in a re-floated fuel and infrastructure business entity, probably to be called “Ampol.”
SEEK (SEK, $22.99)
First-half December 2019
FY21 estimated yield: 1.6%, fully franked (grossed-up, 2.4%)
Analysts’ consensus valuation: $22.20 (Thomson Reuters), $22.22 (FN Arena)
Jobs website operator SEEK is also affected by Covid-19, although the company has not made a specific announcement about the outbreak: SEEK’s subsidiary Zhaopin is the biggest and most popular jobs website in China, and SEEK Asia is a major player in South-East Asia. The company is highly leveraged to job ads not only in China, but South-East Asia, and the Covid-19 outbreak is likely to disrupt these markets significantly. Brokers have moved to downgrade FY20 and FY21 earnings estimates. The highest target price in the market is Credit Suisse’s $23.80, which might induce some buying, but there is not much attraction in SEK for yield-oriented investors.
WEDNESDAY
Rio Tinto (RIO, $97.69)
Full-year December 2019
Market expects about US$9.8 billion ($14.9 Billion)
FY20 estimated yield: 5.9%, fully franked (grossed-up 8.4%)
Analysts’ consensus valuation: $98.76 (Thomson Reuters), $100.34 (FN Arena)
Mining giant Rio Tinto also reports on Wednesday; in its case, full-year results. We already know from BHP and Fortescue Metals that the supply problems out of Vale in Brazil are supporting higher iron ore prices than could otherwise have been expected; higher iron ore earnings should support a stronger dividend for Rio, as was the case for BHP and Fortescue.
Rio will talk about the effect of the Covid-19 outbreak; and also its expectations for Chinese stimulus to try to offset the economic effect of the virus.
The market expects Rio’s profit to fall by about 19% on an EPS basis, but for the dividend to swell from US$3.07 last year to close to US$5.00, before returning somewhere closer to US$4.00 in 2021. At present exchange rates that puts Rio Tinto on a fully franked dividend yield of about 5.9% –6.2% (grossed up to 8.4%–8.8%) for Australian investors, and on a very undemanding P/E ratio of about 10.7 times
A2 Milk (A2M, $15.63)
First-half December 2019
Market expects about NZ$180 million, versus NZ$153 million last year
FY21 estimated yield: 0.3%, unfranked
Analysts’ consensus valuation: $13.74 (Thomson Reuters), $15.04 (FN Arena)
On Wednesday, we also hear from premium milk supplier – and market darling – A2M Milk.
While China is not the only growth driver for A2 Milk – the US is also a big growth market for the company – it is very important. That has worried investors who are thinking about Covid-19, although A2M has yet to specifically address the issue. (Its infant formula supplier, Synlait, did make a profit downgrade this month, citing a softer infant formula market in China and the coronavirus outbreak.
However, some brokers – most notably Citi – believe that the Covid-19 outbreak could actually have a positive impact on A2M’s second-half FY20 margins, as Chinese households stockpile supplies using online orders.
In the meantime, though, brokers see A2M as over-valued – and its dividend yield is a non-factor.
Afterpay (APT, $38.99)
Buy-now, pay-later (BNPL) leader Afterpay – also a WAAAX stock, and member of the S&P/ASX All Technology Index launched last week – reports first-half (December 2019) results on Wednesday.
Market expects loss of about $4 million, compared to loss of $22 million a year ago
FY21 estimated yield: no dividend expected
Analysts’ consensus valuation: $36.50 (Thomson Reuters), $33.84 (FN Arena)
The market is expecting a net loss, but that is not what investors are concentrating on: the big story at Afterpay is how it is travelling in its launch into the US. The company’s numbers – and commentary – around its US business will be the most critical part of its presentation on Wednesday.
However, APT has doubled in price in the past year, and much of its success is baked into the share price. Given that there are not yet earnings, there is no trailing (historical) P/E. Analysts expect the company to make a net profit in the full-year FY20 – but at 5.3 cents, the consensus forecast profit gives a ludicrous projected P/E of 735 times earnings. Even the expected five-fold uptick in EPS in FY21 only brings the forward P/E down to 147 times earnings.
What do investors do? They can look at price-to-sales, but even that measurement is currently over 40 times. That will come down, eventually, but it is very difficult to buy a stock at those levels. Looking at analysts’ consensus valuations, the market thinks APT has run too high.
Woolworths (WOW, $43.45)
First-half December 2019
Market expects about $1 billion, compared to $920 million a year ago
FY21 estimated yield: 2.6%, fully franked (grossed-up 3.7%)
Analysts’ consensus valuation: $36.65 (Thomson Reuters), $37.44 (FN Arena)
Retail giant Woolworths also reports half-year numbers on Wednesday. As the largest grocery chain in the country and also owner of Big W and bottle-shop chains Dan Murphy’s and BWS, Woolies is a highly defensive stock if the economy is going to come under further pressure. The market is factoring in lower profits, and the FY20 dividend yield of 2.4% fully franked (grossed-up to 3.5%) is unlikely to get pulses racing in income portfolios. Woolies is a top retailer and brand, but analysts think it is highly over-valued at present.
Nine Entertainment Company (NEC, $1.74)
First-half December 2019
Reported net profit of $172 Million in the December 2018 half-year
FY21 estimated yield: 5.8%, fully franked (grossed-up 8.2%)
Analysts’ consensus valuation: $2.15 (Thomson Reuters), $2.14 (FN Arena)
Diversified media company Nine – which has TV, radio and online services, as well as print assets (most notably The Sydney Morning Herald, The Age and Australian Financial Review), and also controls the streaming service Stan – looks like it is offering investors a lot of value at the moment, if it meets market earnings expectations. Nine has told the market that first-half profit will be down by about 10%, but that it expects to make up for the weak first half in the second half of the financial year. The publishing division and Stan could be the major sources of growth. Nine also offers, on expected dividend flow, highly attractive yields, and is priced at just 14.2 times expected FY20 earnings.
THURSDAY
Flight Centre (FLT, $39.48)
First-half December 2019
Market expects about $70 million, compared to $85 million a year ago
FY21 estimated yield: 4%, fully franked (grossed-up 5.7%)
Analysts’ consensus valuation: $41.49 (Thomson Reuters), $43.27 (FN Arena)
Another potential value candidate could be travel agency Flight Centre – if the company’s outlook around the Covid-19 outbreak does not worsen. Earlier this month, Flight Centre told the stock market that it expects the outbreak will make it difficult to meet its earnings guidance of $310 million–$350 million for FY20, especially as profits tend to be weighted towards the second half.
The impact has been mostly felt in the company’s Greater China corporate travel businesses – Flight Centre has encouraged staff in China to take leave while uncertainty surrounds the virus.
Managing director and founder Graham Turner says it is impossible to predict the virus’ impact on leisure and corporate travel in general at this early stage, but it appears “certain that it will impact travel patterns to some degree in the near-term.”
There is the risk that analysts’ valuation targets – and dividend expectations – are still too high for the Covid-19 uncertainty: we will know more once Flight Centre gives its outlook.
Ramsay Health Care (RHC, $78.59)
First-half December 2019
Market expects about $285 million, versus $270.4 million a year ago
FY21 estimated yield: 2.1%, fully franked (grossed-up 3%)
Analysts’ consensus valuation: $71.25 (Thomson Reuters), $70.53 (FN Arena)
Big private hospital operator Ramsay Health Care also reports on Thursday – the market expects that subdued volume growth in the Australian private hospital industry will continue. In this light, Ramsay’s overseas diversification moves, where it operates in 11 countries – it has become the second largest private healthcare provider in Europe, with strong positions in both France and Scandinavia – is like gold. However, Ramsay sees net profit falling by about $40 million–$50 million in FY20: analysts think it is over-valued, and its yield is not alluring enough to offset that.
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