Major profit results this week:
For a larger version of this table, click here [1].
With FY17 reporting season winding to a close this week, there is a definite air of disappointment from investors and analysts.
There is still the expectation that the market (effectively, the S&P/ASX 200 stocks) will reach earnings growth of 18% – but that is highly distorted by the profits of the resources stocks, which have more than doubled. Stripping out the resources companies, across the market, profit rise will be more like 5%.
According to Shane Oliver, head of investment strategy and chief economist at AMP Capital, so far 70% of companies have reported higher profits than a year ago, which is the strongest proportion since 2010, while 69% have increased dividends from a year ago.
But as Oliver points out, underneath the bonnet, the season has not been stellar, with only 38% of companies surprising on the upside – which is well down on the market’s normal performance, and the weakest since 2012. About 32% of companies have surprised on the downside, and outlook guidance has also been generally soft.
In many cases the downbeat guidance has surprised the market, given that companies were actually in upgrade mode ahead of result season – for example, Bluescope Steel (BSL) and Insurance Australia Group (IAG).
Outside the miners, confidence in the outlook, and consequent upgrades to FY18 earnings expectations, has been quite hard to find.
Where it has been found, investors have been keen to reward it.
Qantas (QAN), for example, delivered a particularly upbeat view of the economy along with its second-largest profit ever, saying that it was seeing a strengthening domestic market, from both businesses and consumers, and the international business poised to benefit from slowing capacity growth from competitors. Qantas shares initially jumped almost 7% on the result. But at $5.74, the stock is close to what Thomson Reuters’ analysts’ consensus target price of $5.90.
In the same industry, Flight Centre (FLT) brought out a positive forward outlook to accompany its result coming in at the top end of guidance: the stock promptly jumped more than 10%, pushing it to almost 20% above the analysts’ consensus target price of $41.
Likewise, construction heavyweight CIMIC (CIM) delivered a glowing forward outlook, saying its future growth is backed by nearly $50 billion worth of tenders which are to be bid and or awarded in the remainder of 2017, as well as $320 billion worth of upcoming projects. The market liked the outlook, but at $42.15, the stock is well ahead of the analysts’ consensus price target, at $34.68.
Treasury Wine Estates (TWE) also reported a highly positive outlook, to go with the earnings growth it generated from all its major regions, led by near 50% growth in profitability in North America and Asia. Treasury said it would reward shareholders with a $300 million share buyback, because it had delivered on its earnings targets three years ahead of planned. But at $13.97, TWE trades well ahead of its analysts’ consensus target price, at $13.50.
This is a consistent theme: where companies are relatively positive in their outlook, the price has well and truly caught up to the optimism, and has surpassed analysts’ consensus target price.
Other stocks in this category include Monadelphous (MND), Bendigo & Adelaide Bank (BEN), IOOF Holdings (IFL), Sydney Airport (SYD), A2 Milk Company (A2M), Western Areas (WSA), Southern Cross Media (SXL), Janus Henderson Group (JHG), JB Hi-Fi (JBH), Orora (ORA) and Origin Energy (ORG).
Financial services company Suncorp (SUN) boosted full-year cash profit by 3.6% – which fell short of expectations – but also managed to lift its full-year dividend by 7%, helped by a strong performance in its insurance arm. Suncorp said it would maintain a high payout ratio in 2018, a sign of confidence as the company benefits from rising insurance prices.
At $12.95, analysts see Suncorp as having almost 10% scope to move higher, with a consensus target price of $14.24. And to go along with that, there is a consensus expectation of a 6.1% fully franked yield, which equates to 7.4% in a self-managed super fund (SMSF) in accumulation phase, and 8.7% in an SMSF that is paying pensions.
Specialist auto parts wholesaler and retailer Bapcor (BAP) brought out an excellent result, beating consensus estimates at every line, and comfortably exceeding the top end of its guidance range. Like many other retailers, Bapcor has been caught up in concerns about the entry of Amazon to the Australian market, but the company emphasised with its result that the Amazon threat to the car parts business was greatly exaggerated. Bapcor was upbeat in its outlook, having already told the market last month that it expected to open its first outlets in Asia by the end of calendar 2017. At $5.76, is seen by analysts as having about 8% room to appreciate to reach consensus target, with a 3.6% fully franked yield along the way.
Another stock that has been held back by Amazon-related concerns – JB Hi-Fi – lifted its FY17 underlying net profit by 36%, its strongest growth for eight years, and while the electronics retailer did not give specific guidance, analysts were quick to pick up on the implication that, based on changes in JB Hi-Fi’s remuneration policies, statutory earnings before interest and tax will have to grow by between 23%–34% in 2018 for senior executives to achieve short-term incentives. The implied confidence of JB Hi-Fi’s management sits with a share price that is about 7% below analysts’ consensus target price, and a 5.7% fully franked yield to boot – equivalent to 7% in an SMSF in accumulation phase, and 8.2% in an SMSF that is paying pensions.
Funds manager Janus Henderson made a strong debut in its first half-year as a merged entity, with funds under management, net outflows and realisation of synergies from the merge all tracking better than expected, and analysts starting to upgrade full-year earnings. At $44.25, analysts see Janus Henderson as having scope to rise by about 6% to the consensus price target, with a 4.1% full-year yield (unfranked) on offer in 2018.
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