The February reporting season gets underway in earnest this week, with investors feeling unsettled after some high-profile slip-ups in the “confession season” – where companies alert the market to changes in profit guidance for the full year, or downturns in their business (usually both).
Confession season delivered some appalling reactions on the stock market, confirming yet again that companies cannot keep disappointing investors with unexpected (or repeat) profit downgrades.
Global construction and project management software company Aconex (ACX), for example, which has been a great success story in the Software-as-a-Service (SaaS) market – and become a fund manager favourite on the back of that success – shocked the market last week when it warned that full-year profit would come in up to 35% less than analyst estimates. The shares lost half of their value in response.
That kind of thing is massively frustrating for investors – the quick halving took Aconex shares back to where they were in June 2015.
Radioactive liver cancer treatment company Sirtex Medical (SRX) was another to anger the market in confession season, when it surprised the market with a profit downgrade: there had been no hint of the problems at the company’s annual general meeting (AGM) in October, nor at an Investor Day it held a week before the downgrade. It was also halved in value by an unforgiving market.
Serviced office provider Servcorp (SRV) lost 20% in a day last week after bringing out an unexpected downgrade; foreign exchange trader OFX Group – the former Ozforex – plunged 25% after a surprise profit warning; IVF services provider Virtus Health (VRT) lost 20% of its value after reporting lower first-half volume – and fellow IVF services provider Monash IVF lost 10% through guilt by association.
It has not all been negative, however: BlueScope Steel (BSL) surged to its highest price in six years on the back of an upgraded earnings forecast, while engineering and mining services provider Downer EDI’s (DOW) shares gained 13% after the company lifted half-year profit by 8.5% and demonstrated to the market that its shift to rail, transport services and technology sectors was offsetting the continuing downturn in its core mining services business.
The results start to flow this week, and the market is looking for confirmation of its belief that earnings growth across the S&P/ASX 200 stocks will accelerate strongly in the financial year 2016-17, for the first time in three years, driven by booming earnings in the resources stocks.
Last month, we told you that analysts expected the market to show earnings growth of 8%–11% for FY17. This month, broking firm Citi has pushed that estimate higher, saying it now expects 17% growth in earnings per share (EPS) across the market, driven by 82% gains in resources earnings and 15% in the food and beverage stocks.
But Citi expects the banks to lag the average badly, reporting earnings growth of 2.7%.
AMP Capital (AMP) is also looking for 17% profit growth – it expects resource company profits to more than double – but profit growth across the rest of the market is likely to be around 5% led by retailers, utilities, telecommunications and building materials companies. AMP Capital says key themes for the season, apart from the massive turnaround for resources companies, are likely to be constrained revenue growth for banks and industrials; and an ongoing focus on dividends.
The highlight this week will be the full-year (calendar 2016) result from diversified mining giant Rio Tinto (RIO), on Wednesday. Rio Tinto reports in US$, and the market is looking for underlying earnings of about US$4.7 billion, and:
FY16 EPS change: from –47.5 cents in FY15 to 273.6 US cents
FY16 Dividend per share (DPS) change: –34.6% to 140.6 US cents
At present exchange rates, the Rio Tinto dividend translates to an expected 2.8% fully franked yield for FY17 – a far cry from recent years, but last year Rio ditched its “progressive dividend” policy, which guaranteed that dividends never fell, and has switched to an intention to return between 40%–60% of underlying earnings over the longer term. That has lowered Rio Tinto’s dividend yield from 5.5%, but the dividend now much better reflects what the company earns. In any case, analysts’ consensus (at current exchange rates) expects Rio Tinto (at the current share price of $64.53) to pay 4.5% in FY17, as earnings surge even higher.
Analysts are bullish on Rio Tinto, with a consensus price target, on FNArena’s collation, of $68.02, representing capital gain of 5.4% if borne out. (The most bullish broker, Macquarie, sees Rio Tinto at $74.00).
Global construction and engineering group CIMIC (CIM) – the former Leighton Holdings – also reports full-year earnings on Wednesday. Analysts’ consensus expects:
FY16 EPS change: –0.7% to 152.6 cents
FY16 Dividend per share (DPS) change: +3.2% to 99.1 cents
The expected CIMIC dividend places the stock at $34.94, on a prospective fully franked dividend yield of 2.8%, rising to 3.1% in FY17. That is not very inspiring – and worse is the analysts’ consensus price target for CIMIC, which at $23.66 is 32% below the current price.
Mortgage insurer Genworth Mortgage Insurance Australia (GMA) will also report for the 2017 year on Wednesday. There, the analysts expect:
FY16 EPS change: +4.8% to 37 cents
FY16 Dividend per share (DPS) change: +41.9% to 37.6 cents
That indicates that GMA will pay out more than it earns – not an uncommon situation, but obviously not a sustainable one. The expected fully franked yield is 10.7%. In more normal times, GMA says it targets an ordinary dividend payout ratio range of 50%–80% of profit: analysts expect the payout ratio to come down to 89.3% in 2018, for a yield of 9%. The yield looks attractive, but investors should remember that GMA is exposed to Australian housing market risk, and analysts have a consensus target price on the stock of $3.19 – versus the current share price of $3.50.
Financial services heavyweight AMP reports its full-year result on Thursday. Analysts expect:
FY16 EPS change: –58.9% to 13.7 cents
FY16 Dividend per share (DPS) change: +0.7% to 28.2 cents
AMP will be under pressure to show that it is not an “ex-growth” stock, with structural weakness in its life insurance division. The share price has gone nowhere for more than a decade. On a yield basis, the 2016 dividend translates to 5.6%, probably 90% franked: the yield rises to 5.8% in 2017. Analysts see some scope for AMP to generate capital gain: the consensus price target, at $.43, is 7.3% above the current price. But investors would need to see clear evidence in this result of an improving performance (and outlook) for the wealth management business.
Anglo-Australian funds manager Henderson Group also reports full-year results on Thursday: analysts expect Henderson (which reports in UK pounds) to show:
FY16 EPS change: –12.2% to 15.1 pence
FY16 Dividend per share (DPS) change: –4.9% to 9.8 pence
At current exchange rates, that dividend would translate to a 2016 yield of 4.6%, expected to rise to 5% in 2017. But the yield is unfranked. Analysts are quite bullish on Henderson, however, holding a consensus price target of $4.34, or 26% above the current price of $3.45. But anyone thinking of buying Henderson must be wary of any confirmation in the result of continued funds outflows from the manager in the December quarter: the group was plagued by retail investors pulling funds out in 2016 – particularly from the Henderson UK Property Fund and funds focused on European assets – in the aftermath of the UK’s Brexit referendum on EU membership.
Henderson is three years into a five-year growth strategy, which will be completed at the end of 2018. In April, Henderson shareholders – about 60% of the equity is owned by Australian investors – will vote on a planned $400 billion funds-under-management merger with US-based Janus Capital, the fund of renowned bond investor Bill Gross.
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