The 2017-18 financial year reporting season kicks off in earnest this week, with the market – meaning, in essence, the A&P/ASX 200 stocks – expected to show profit growth of about 5%–7% for FY18.
The ‘headline’ earnings growth figure for the market is always a mixture of results for the main segments of the listed-company world – loosely, resources, industrials, banks and real estate investment trusts – and this year, as in FY17, the market is relying on the resources companies to do most of the heavy lifting.
Brokerage Goldman Sachs, for example, projects 5.9% growth in earnings per share (EPS) across the market, powered by a 23% uplift from the resources stocks, a 5.1% gain in industrial stocks and 5% from the real estate investment trusts (REITs). But Goldman Sachs expects the banks’ EPS to go backwards, by 2%.
The outlook improves to almost 8% profit growth in the current financial year, with resources again leading the charge, and all sectors positive, with banks rebounding to 4% profit growth. Deutsche Bank sees FY19 profit growth a touch higher, at 9%.
Let’s take a look at some of the more interesting company reports due this week.
1) Commonwealth Bank of Australia (CBA) – reports Wednesday 8 August
CBA is the only major bank due to report its earnings in the season, being the only one with a June 30 balance date, although NAB will release a third-quarter trading update on August 14. The major point in the CBA result is that profit will fall.
Market consensus is looking for CBA to report a cash profit from continuing operations of about $9.48 billion, down about 4% from the $9.88 billion reported in FY17. On Thomson Reuters’ collation of analysts’ forecasts, CBA’s earnings per share (EPS) is expected to fall 4.1%, to $5.335, while FN Arena’s collation sees it at $5.349.
The problem for CBA is three-fold. First, banking industry fundamentals are on the slide – for example, rapidly slowing housing credit growth, declining net interest margins and fee pressure.
Second, wholesale funding costs are rising, as global demand for capital increases: overseas central banks are raising cash rates and money market rates are also rising, making it more expensive for banks to raise wholesale funding for loans. And third, the Royal Commission has also contributed to increased costs, in the regulatory and compliance area.
CBA has already agreed to pay the biggest fine in Australian corporate history, for breaches of anti-money laundering and counter-terrorism financing laws. The bank will pay $700 million plus legal costs, after federal financial intelligence agency AUSTRAC last year accused the bank of serious and systemic failures to report suspicious deposits, transfers and accounts.
Of course, that is just one event from a seriously bad year for CBA, which has seen the resignation of Ian Narev as chief executive, a board overhaul, the Royal Commission, APRA’s (the Australian Prudential Regulation Authority) prudential inquiry, a soft third-quarter trading update and settlement of the BBSW (bank-bill) rate rigging case, among others.
The net interest margin will be a very interesting number, given that CBA has been reluctant to lift mortgage rates in a competitive environment, but it has cut rates on some of its fixed-term loans to win back market share from smaller competitors. Last year (FY17) the net interest margin slipped by three basis points (0.03%) to 2.11%.
Also, expect to see further detail on the bank’s retreat from wealth management, insurance and mortgage broking.
Despite the profit fall, the dividend should stay flat, or even increase slightly, from last year’s $4.29 a share. CBA has already paid a fully franked interim dividend of $2.00 a share, 1 cent higher than a year earlier. Just matching last year’s final dividend of $2.30 would see a full-year payout of $4.30.
2) Tabcorp (TAH) – reports Wednesday 8 August
Gambling heavyweight Tabcorp is expected to be a reasonably positive story, after its merger with Tatts Group, with underlying earnings expected to be up about 30%, and EPS coming in at about 15.2 cents (FN Arena), or 17 cents on Thomson Reuters’ collation, compared to the post-significant-items EPS loss of 2.5 cents a share last year.
But the $91 million after-tax hit to the bottom line coming from the now-exited Sun Bets online wagering joint venture (with News Corporation) in the UK will hurt. At the half-year, Tabcorp shareholders were told the struggling venture had cost them $52 million.
Last year, Tabcorp paid a full-year dividend of 25 cents. FN Arena puts analysts’ consensus expectation for the FY18 dividend at 19.9 cents, while Thomson Reuters has it at 20.4 cents.
Investors will be expecting positive news on the synergies the company is gaining from the merger with Tatts.
3) AMP (AMP) – reports Thursday 9 August
AMP’s half-year result on Thursday will also show Royal Commission baggage. The company has already warned shareholders to expect a dip in profit, with underlying first-half profit of between $489 million-$500 million foreshadowed, down from $533 million reported a year ago. Revealing this warning last month, AMP also revealed that its profit would be hit by $415 million in compensation costs to customers found to have been affected by poor or non-existent advice going back ten years. In total, damage from the Royal Commission will set AMP back by about $615 million – not including the reputational and market-capitalisation costs.
Investors were also told to expect a lower interim dividend than the 14.5 cents paid for the first half last year. Analysts see a significant drop in the full-year dividend from 2017’s 29 cents: FN Arena puts analysts’ consensus at 24.3 cents, while Thomson Reuters has it at 23.5 cents.
The bottom line is that AMP is troubled – but shareholders will hope that all the bad news is in the market, and that there aren’t any fresh bombs dropped on Thursday.
4) AGL Energy (AGL) – reports Thursday 9 August
Like the big financial names, AGL Energy – as one of the big three electricity “gentailers,” along with Origin Energy and the foreign controlled EnergyAustralia – has experienced heavy regulatory pressure in 2018. AGL has sustained plenty of criticism for its role in the nation’s electricity market, which is trying to boost investment in renewable energy, while also requiring coal-fired back up. AGL is closing its Liddell coal-fired plant, bringing the allegation that it is doing so to protect its generating margins on its Bayswater and Loy Yang A coal-fired power stations, in a tightly supplied market.
The Australian Competition & Consumer Commission (ACCC) recently fingered the incumbent vertically integrated gentailers of “reaping the benefits of higher spot and futures prices” while also, in AGL’s case, the market sees it deliberately withdrawing capacity and refusing to sell the asset (Liddell) to a willing buyer.
AGL has also copped flak for its decision to sell $2 billion of gas that ended up as exported LNG, which has arguably helped to drive up domestic gas prices – and sees AGL now considering importing gas. This week’s result should feature an update on gas import plans.
The company recently appeared to be singled out by the ACCC in its recommendation to prohibit acquisitions or other arrangements (other than investment in new capacity) that would limit market shares to 20% per cent in any region, or across the national energy market as a whole, to prevent further “harmful concentration.” AGL’s national market share stands at 21%, meaning its ability to participate in acquisition opportunities will be curtailed.
But some brokers believe the outcome of price re-regulation could actually reduce market competition and see market share gains by AGL and the other incumbents.
In this result, expect to see earnings up by about 20%, with an underlying profit in the range of $940 million–$1.04 billion. Last year, AGL paid a full-year dividend of 91 cents. FN Arena puts analysts’ consensus expectation for the FY18 dividend at $1.121, while Thomson Reuters has it slightly higher, at $1.125.
5) Suncorp Group (SUN) – reports Thursday 9 August
Analysts expect a reasonably solid result from the financial services company, with a profit of about $1 billion. On an EPS basis, FN Arena’s analysts’ consensus collation sees EPS falling by 4% to 80.4 cents, while Thomson Reuters has analysts’ consensus at 80.9 cents. FN Arena projects a slight dividend fall, from 73 cents to 72.4 cents, while Thomson Reuters sees the dividend holding steady.
Suncorp has been reviewing its life insurance business: most investors would welcome announcement of a sale. Investors will also be looking for a strong performance in general insurance, with the company on top of its costs.
6) Crown Resorts (CWN) – reports Thursday 9 August
Casino operator Crown Resorts has had more than its share of headlines lately, most recently with the personal issues of its major shareholder, James Packer, and a five-year review of its Victorian licence telling it to lift its game on governance and responsible gambling. Its licence approval remains conditional on a separate review into the 2016 arrest of several Crown staff members in China for gambling-related offences.
The FY18 result coming out this week is expected to show underlying net profit of about $380 million, up from $343 million last year. (Crown Resorts’ reported FY17 net profit was $1.9 billion, but that was entirely due to its retreat from Macau.) Difficult trading conditions last year saw total normalised revenue across Crown’s Australian resorts fall by 12.7% – investors will be looking for an improvement there. At EPS level, underlying EPS was 42.5 cents in FY17: Thomson Reuters has analysts expecting 53.3 cents this year, while FN Arena puts the consensus expectation at 54.9 cents.
Last year, Crown paid a full-year dividend of 60 cents, saying it would pay this amount as a fixed dividend every year, subject to its financial performance. According to both Thomson Reuters and FN Arena, analysts expect this to be maintained. (Crown also paid an 83-cent special dividend in the first half last financial year.)
The result could also contain announcements regarding Crown Sydney, capital management programs, and a Melbourne hotel joint venture development.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
