The FY19 full-year reporting season is upon us, and in general, it is not going to be pretty.
Kicking proceedings off are a slate of prominent companies, including ResMed, Rio Tinto, Transurban, Commonwealth Bank, Suncorp, AMP, AGL Energy, Mirvac and Insurance Australia Group.
Earnings growth looks likely to be very hard to come by, except in the resources sector, which will be led by the big iron ore producers. Even that growth can be considered a bonus, with iron ore prices unexpectedly strong on the back of the supply problems that have hit big Brazilian miner Vale in the wake of tailings dam collapses. Vale has indicated that it will produce at about three-quarters of its capacity this year, and analysts suspect that the big Brazilian getting back to full production (about 400 million tonnes a year) will take longer than the market expects – resulting in an iron ore price that is 60% higher than it was before the tailings dam collapses, at a five-year high, and likely to remain higher than the market expected, and for longer.
For Fortescue Metals Group (FMG), for example – which is reporting full-year June 30 results – that is expected to see earnings per share (EPS) surge more than three-fold, from 28.2 US cents in FY18 to 98.3 US cents. This will flow into a dividend that is expected almost quadruple, from 23 US cents to 93 US cents.
It should be a similar story at Rio Tinto, which recently reported that the average price paid for its iron ore was up 35.6% in the first half of 2019. Iron ore looks set to deliver Rio Tinto about $US12.1 billion ($A17.2 billion) in the first half, an increase of $US2.4 billion on the first half of 2018. But Rio is also facing higher costs to produce iron ore in 2019, with its unit cost guidance increased to $US14–$US15 a tonne, up from $US13–$US14 a tonne. As well, production problems in the Pilbara mean that Rio Tinto is missing the full benefit of the iron ore price; and the big miner has warned that its Mongolian copper project, Oyu Tolgoi, could suffer cost blowouts of up to $US1.9 billion ($2.69 billion), and that impairment will be reported in the half-year result.
However, the cash generation at current iron ore prices should mean a boosted dividend. On a full-year basis, analysts expect Rio Tinto to lift its fully franked dividend by close to 50%.
BHP is reporting full-year results too, and the market is also expecting a solid lift in earnings, with EPS projected on FN Arena’s analysts’ estimates collation to rise by 14%, but the fully franked dividend largesse forecast to show much stronger growth, at just over double the US$1.18 dividend paid for FY18, at US$2.40.
Outside the resources sector, however, it is a dire outlook. A year ago, the market (that is, the S&P/ASX 200 stocks) was expected to show EPS growth of about 9% for FY19. The interim results season in February saw that expectation halved, and entering the full-year results season, it is down to about 1.6%. And that is virtually all due to the big miners, which have been given big EPS upgrades. Elsewhere, downgrades have been the norm.
The red texta has been put through the formerly optimistic earnings expectations of a swathe of companies – usually accompanied by a share price slump to match. Online jobs site Seek (SEK), real estate listings company Domain Holdings (DHG), annuities provider Challenger (CGF), fuel business Viva Energy (VEA), superannuation administration technology company Link Administration Holdings (LNK), horticultural business Costa Group Holdings (CGC), data company Appen (APX), plumbing supplies manufacturer Reliance Worldwide Corporation (RWC), travel agency chain Flight Centre Travel Group (FLT), steel products maker BlueScope Steel (BSL), vitamins and supplements heavyweight Blackmores (BKL), media companies Seven West Media (SWM) and Prime Media (PRT), household goods retailers Beacon Lighting (BLX) and Adairs (ADH), casino operator The Star Entertainment Group (SGR), soon-to-merge car dealers AP Eagers (APE) and Automotive Holdings Group (AHG), agricultural chemicals company Nufarm (NUF), building materials supplier Adelaide Brighton (ABC), traffic report provider GTN, National Australia Bank (NAB) and Wesfarmers (WES), which warned of lower earnings from its Kmart discount department store chain, are just some of the plethora of earnings guidance downgrades that have plagued investors so far this year.
According to broking firm Morgans, for every earnings upgrade, there have been seven downgrades.
At least this means that stocks enter the August reporting season with very low expectations for FY19 earnings growth.
So, apart from the big miners, which companies are seen as capable of delivering good news?
Morgans is looking to a small group with the potential to beat expectations – specialist milk supplier A2 Milk Company (A2M), AP Eagers, Medibank Private (MPL), legal firm IPH (IPH), cloud technology company Megaport (MP1) and mortgage broker Australian Finance Group (AFG). The broker says positive moves on capital management could come from BHP, Rio Tinto, Origin Energy (ORG) and rail freight operator Aurizon (AZJ), while it expects the “solid fundamentals” of Treasury Wine Estate (TWE), Cleanaway Waste Management (CWY) and Telstra (TLS) to be a feature of their results.
Macquarie analysts see Fortescue Metals (FMG), property group Charter Hall (CHC), reborn global engineering firm Worley (WOR) and A2 Milk as the house’s top candidates to beat market consensus estimates.
In the “stocks to avoid” camp, Morgans has biotech Nanosonics (NAN), infant formula supplier Bellamy’s Australia (BAL), data centre operator NextDC (NXT), Carsales.com (CAR), Flight Centre, drinks company Coca-Cola Amatil (CCL), biotech superstar CSL Limited (CSL) – the broker says investors should wait for a better entry point to CSL, with its price target of $199.20 below the current share price of $228.80 – as well as real estate listings site operator REA Group (REA), AGL Energy (AGL) and Woodside Petroleum (WPL).
Macquarie views diversified global miner South32 (S32), Commonwealth Bank (CBA) and global hearing-aid leader Cochlear (COH) as prime candidates for disappointment. And if there is one thing investors have learned in recent years, any disappointment in the context of reporting an actual result – when there has been plenty of time to soften-up the market through a self-reported guidance downgrade – will go down very poorly on the market.
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