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It’s a big week in reporting season this week, with increased representation from the market’s top stocks reporting.
On Tuesday, we will see the June quarter update from the ANZ, and this figure will be closely watched to see if it continues the theme of major banks being poised to report better-than-expected results, after Commonwealth Bank’s record annual cash profit reported last week.
Analysts’ consensus currently expects ANZ to lift earnings by about 13% for the full-year (to September 30). Brokers do not usually forecast quarterly numbers, but will feed the run-rate into their forecasts, if it differs markedly from their estimates in place. Analysts downgraded full-year earnings expectations for ANZ after the interim result in May, mainly on the back of the outlook for the institutional bank and the exit from Asia.
ANZ fell short of expectations in its interim result in May (for the six months to March 31), despite lifting cash profit by 23% to $3.4 billion. The closely scrutinised net interest margin (NIM) fell six basis points from the September 2016 reading, to 2%. Investors will be very interested in this figure tomorrow: the NIM represents the profit from lending. The bank’s statement on the outlook for the credit environment will also come under scrutiny.
Former market favourite Domino’s Pizza reports on Wednesday. Domino’s has fallen by one-third in price since August, slipping from a prospective (forecast) FY17 price/earnings (P/E) ratio of 57 times earnings to 38 times earnings, as analysts’ projections for sales and earnings growth have slowed.
Analysts still expect about 27%–37% earnings growth from the fast-food leader for the full year, and a price rebound: on analysts’ consensus price targets, FN Arena’s collation has $63.59, which is 23.7% above the current share price, while Thomson Reuters puts the consensus target at $65.90, implying 28% upside. However, Domino’s Pizza is not yet a great yield payer: the FY17 projected yield is 1.8%, improving to 2.5% in FY18, franked to about 59%.
Biotechnology giant CSL also reports on Wednesday. CSL lifted its earnings guidance in January, saying strong sales of immunoglobulin and specialty products meant its full-year underlying net profit would likely rise by 18%–20%, up from previous guidance for 11% growth.
In February, the company announced a net profit after tax (NPAT) of US$806 million ($1.1 billion) for the six months ended 31 December 2016, up 12%. For the full year, analysts expect earnings of about US$3 a share, up from US$2.69 a year ago. CSL is moving like the Rolls-Royce stock it is: FN Arena puts the analysts’ consensus price target at $137.87, 9.2% above the share price, while Thomson Reuters projects a slightly higher target, at $138.42.
The most-watched result of the week will be Telstra’s, on Thursday. The focus here will be on the dividend, with analysts saying the weak earnings outlook leaves the current dividend very vulnerable. Analysts polled by FN Arena believe the FY17 dividend announced this week will rise, from 31 cents to 31.1 cents, while Thomson Reuters’ collated expectation has it staying at 31 cents. But it’s FY18 and onward that starts to look problematic for Telstra’s dividend: analysts expect 29.6 cents in FY18, and brokers Citi and Credit Suisse expect a 25% cut from FY18, taking the dividend to 25 cents.
Citi says shareholders would be better off if the dividend was cut now, and excess cash directed either into share buybacks or acquisitions to generate growth.
That’s not what self-managed super fund (SMSF) shareholders want to hear. If Telstra pays 31 cents for the full-year on Thursday (the interim dividend was 15.5 cents), a Telstra shareholder who bought the shares five years ago, at $3.90, is looking at a nominal yield of 7.9%. If the shares are held in an SMSF in accumulation phase, and receiving a partial rebate of the franking credits (because the fund earnings are taxed at 15%), that yield is equivalent to 9.6%. And if the shares are held in an SMSF in full pension phase, and receiving a full rebate of the franking credits (because the fund’s earnings are not taxed), that yield is equivalent to 11.3%. It’s not hard to see why Telstra shareholders are very sensitive to the prospect of a falling dividend – particularly given that their capital growth experience has not been spectacular.
Telstra could announce a securitisation program for its 30-year recurring NBN payments. Ord Minnett reckons Telstra could receive $13 billion–$18 billion from this, for which it says the most prudent use would be share buybacks, to boost EPS.
Global hearing implant maker Cochlear also reports on Thursday.
Cochlear has been a strong performer this year, gaining 15.7% – it was actually up more than 30% until the stock hit some turmoil, with the unexpected departure of its chief executive in July meaning that the company would have its third chief executive in as many years. But Cochlear pleased the market earlier this year by reaffirming its full-year guidance: Cochlear expects FY17 full-year net profit of between $210 million and $225 million, which equates to growth of between 10% and 20% on the prior year.
Another number the market likes to look at is Cochlear’s return on equity (ROE), which has swelled from 15% in 2012 to 42% last year – further improvement there would be very welcome. Cochlear’s dividend is expected to show a solid lift for the full year, up almost 18% to 270.7 cents, but that is only enough to generate a fully franked yield of 1.9%. And both FN Arena and Thomson Reuters have analysts’ consensus price targets well below Cochlear’s current share price.
Retail giant Wesfarmers also reports on Thursday: WES is predicted to bounce back from a horror year in FY16, when bottom-line profit plunged 83% to $407 million – the lowest result since 2002 – dragged down by $2.1 billion in asset impairments on Target and coal. Underlying profit fell 3.6% to $2.35 billion, and Wesfarmers was forced to cut its final dividend for the first time in almost a decade.
Although profit is expected to rebound strongly after the impaired FY16 result, and the dividend to be lifted by about 17%, there are still significant concerns around Wesfarmers. There is the imminent entry of Amazon: broker UBS says that 73% of Wesfarmers’ EBIT (earnings before interest and tax) is exposed to competition from Amazon. Also, there is a fresh outbreak of the supermarket price war, as Woolworths climbs off the canvas: Woollies has outperformed Coles in growth since the second quarter of the 2016-17 financial year. German discounter Aldi is also proving a tough competitor, and Amazon Fresh is due to enter the market in 2018.
Analysts expect earnings at Wesfarmers to slide in FY18, which makes the tone of the company’s outlook statement this week very important for share price sentiment.
The market is also expecting to hear more certainty about the sale of Wesfarmers’ coal business: it is selling its 100% equity interest in the Curragh metallurgical (steel-making) coal mine in Queensland, and its 40% stake in the Bengalla thermal (electricity) coal mine in New South Wales. The company’s coal business reported $742 million revenue in the six months to December 31, which was up 24% cent on the previous year, and $171 million in EBITDA (earnings before interest, tax, depreciation and amortisation.) Analysts expect the assets to be worth about $2 billion, although valuations are highly sensitive to long-term coal price and exchange rate forecasts.
Some clarification could also come on the company’s intentions for Officeworks, which was touted as a potential $1.5 billion stock market float earlier in the year, but the initial public offering (IPO) plan was shelved in May “in light of current equity market conditions” – meaning, spooked by Amazon’s impending arrival.
Another figure that will be closely watched is Wesfarmers’ return on equity (ROE). Way back in the pre-Coles days, Wesfarmers generated ROE of more than 25%, but this has been as low recently as 8.4%. ROE has increased to 9.6% over the last year, and investors will be looking for continued improvement.
There are also some heavyweight stocks with half-year results coming out this week. Woodside Petroleum reports interim numbers on Wednesday: analysts expect a figure around US$560 million, a big improvement on the US$340 million earned a year ago, and improved interim dividend from the 32 US cents a year ago.
Insurance giant QBE brings out half-year numbers on Thursday. The market expects interim net profit of about US$264 million ($334 million), virtually the same as the $US265 million a year ago, and an interim dividend of about 15 US cents, down from the 21 US cents at June 2016, on the way to lower full-year profit and dividend.
QBE shocked the market in June with a profit downgrade, which came just a month after the company confirmed its 2017 guidance at its annual general meeting. The downgrade saw 10% taken off the share price. Analysts will focus on QBE’s insurance profit margin (the ratio of insurance profit to net earned premium income): QBE has forecast interim insurance profit margin to be in the range of 8.5%–9.5%, down from the insurance profit margin of 9.7% it reported in 2016.
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