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Smack down – more earnings pain

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We’re about one-third through the FY13 full-year reporting season and Australia’s companies are showing that it’s still a tough world out there, with commodity prices coming off, a still-patchy global economy and domestically, a continuing reluctance of Australian consumers to spend. Many companies are getting some help from lower Australian interest rates and the weaker $A – but this is not coming through quickly enough.

That is not to say that companies are reporting weaker results. Shane Oliver, head of investment strategy at AMP Capital, who keeps close track of the profit season, says 70% of companies have seen their profits rise from a year ago.

[1]But in reporting season, straight rises in profits are not the most important thing. The “beat rate” – as it is called in the US – the extent to which companies exceed the market’s expectations is arguably more important; as is the tone of the “outlook” statements that companies make about the year ahead.

About 35% of companies that have reported so far have come in below expectations, says Oliver. That’s the worst result on the “beat rate” since February 2009.

[2]42% of companies have beaten expectations, a slight fall on the 44% of companies that did so in the February interim reporting season.

Low expectations

This means that there are still companies disappointing the market – even though those expectations have been lowered. According to consensus earnings estimates collated by Thomson Reuters, analysts’ consensus estimates for the S&P/ASX 200 companies fell by 4% last financial year. The main culprit has been the deteriorating outlook for the big miners: materials companies’ earnings are estimated to be down 26% over the last financial year. Just six months ago, those earnings were forecast to fall much less, by 16%.

Earlier this year, analysts expected company profits across the S&P/ASX 200 to grow by 12%. That growth expectation has evaporated – the consensus now expects a fall of 0.5%. Analysts are now cutting – more pruning than slashing – their FY14 forecasts, not only for companies that have disappointed, but also for those that actually met FY13 expectations.

An income surprise

But there have been some positives out of the season. In particular, dividends have surprised on the upside: Oliver says 65% of companies to have reported so far have increased their dividends from a year ago, and only 9% have cut them.

Also, Oliver says, there have been more positive outlook comments than negative. While corporates acknowledge the uncertainty, he says, the fact they haven’t been too gloomy about the outlook is a good sign.

[3]But the consensus still looks for 8% growth in earnings across the S&P/ASX 200 in FY14 – not as strong as the 12% growth expected for FY14 just six months ago.

The highlight of reporting season so far has been CBA’s record $7.8 billion cash profit, revealed last week. The mega-result – the largest banking profit in Australian history – represented a rise of 10%, and was well ahead of expectations. The “most expensive bank in the world” lifted its final dividend to $2 a share, taking the total for the year to $3.64, a 9% rise on the previous year.

CBA showed the tyranny of expectations, though, suffering a share price fall on the day it released its result – mainly because the market believed the press of a special dividend.

This week, the highlight will be BHP’s result, which comes out tomorrow. Given weaker commodity prices, the market is expecting profit to fall by about 26%, from $US17.1 billion (BHP reports in $US) to about $US12.5 billion. But under BHP’s progressive dividend policy, the annual dividend is nevertheless expected to increase from $US1.12 a share to as much as $US1.17 a share.

This week’s major full-year reports, with consensus earnings per share (EPS) and dividend per share (DPS) expectations, are as follows:

Tuesday

BHP Billiton (BHP): EPS US235.7 cents (US321.6 cents FY12), DPS US116.6 cents (US112 cents FY12)
CFS Retail Property Trust (CFX): EPS 13.5 cents (14.4 cents FY12), DPS 13.7 cents (13.1 cents FY12)
Charter Hall Retail REIT (CQR): EPS 29.8 cents (28.8 cents FY12), DPS 26.8 cents (26.1 cents FY12)
Coca-Cola Amatil (CCL): EPS 72.7 cents (60.4 cents FY12), DPS 60.9 cents (56 cents FY12)
Monadelphous (MND): EPS 177 cents (155.2 cents FY12), DPS 151.6 cents (125 cents FY12)
Super Retail Group (SUL): EPS 59.6 cents (46.1 cents FY12), DPS 37.2 cents (32 cents FY12)
Webjet (WEB): EPS 20.3 cents (18.8 cents FY12), DPS 14.4 cents (13 cents FY12)

Wednesday

APA Group (APA): EPS 26.2 cents (20.4 cents FY12), DPS 35.6 cents (35 cents FY12)
Asciano (AIO): EPS 35.4 cents (24.7 cents FY12), DPS 10.6 cents (7.5 cents FY12)
Boral (BLD): EPS 12.6 cents (23.8 cents FY12), DPS 8.9 cents (11 cents FY12)
Clough (CLO): EPS 11 cents (5.6 cents FY12), DPS 4.7 cents (2.6 cents FY12)
Emeco (EHL): EPS 5.9 cents (11.5 cents FY12), DPS 2.7 cents (6 cents FY12)
Suncorp (SUN): EPS 44.3 cents (56.7 cents FY12), DPS 65.6 cents (55 cents FY12)
iiNet (IIN): EPS 35 cents (23.9 cents FY12), DPS 17.9 cents (14 cents FY12)
Investa Office Fund (IOF): EPS 22.2 cents (16 cents FY12), DPS 17.8 cents (15.6 cents FY12)
McMillan Shakespeare (MMS): EPS 83.3 cents (76.6 cents FY12), DPS 43 cents (47 cents FY12)
Tatts Group (TTS): EPS 15.5 cents (23.8 cents FY12), DPS 14.9 cents (23 cents FY12)
Treasury Wine Estates (TWE): EPS 19.4 cents (20.9 cents FY12), DPS 12.9 cents (13 cents FY12)

Thursday

ASX (ASX): EPS 198.1 cents (193.7 cents FY12), DPS 171.1 cents (177.9 cents FY12)
Aurizon (AZJ): EPS 20.7 cents (17.7 cents FY12), DPS 10.3 cents (8.7 cents FY12)
Brambles (BXB): EPS US43.6 cents (US38.9 cents FY12), DPS US27.6 cents (US26 cents FY12)
Echo Entertainment (EGP): EPS 14.8 cents (5.9 cents FY12), DPS 7.4 cents (4 cents FY12)
Envestra (ENV): EPS 6.3 cents (4.9 cents FY12), DPS 6 cents (5.8 cents FY12)
Fortescue Metals (FMG): EPS US53.7 cents (US50.1 cents FY12), DPS US1.5 cents (US8 cents FY12)
Fairfax Media (FXJ): EPS 7.2 cents (–116.2 cents FY12), DPS 2.2 cents (3 cents FY12)
Origin Energy (ORG): EPS 69 cents (90.6 cents FY12), DPS 50 cents (50 cents FY12)
Insurance Australia Group (IAG): EPS 49 cents (10 cents FY12), DPS 30.5 cents (17 cents FY12)
IOOF Holdings (IFL): EPS 45.3 cents (8.4 cents FY12), DPS 43 cents (37 cents FY12)
Pacific Brands (PBG): EPS 8.5 cents (–49.1 cents FY12), DPS 5.3 cents (4.5 cents FY12)
Seek (SEK): EPS 51.6 cents (39.1 cents FY12), DPS 20.6 cents (17.3 cents FY12)
Seven West (SWM): EPS 17.5 cents (33.3 cents FY12), DPS 10.9 cents (25 cents FY12)
Toll Holdings (TOL): EPS 38.2 cents (41.6 cents FY12), DPS 26.2 cents (25 cents FY12)

Friday

Breville (BRG): EPS 37.9 cents (35.4 cents FY12), DPS 26.6 cents (24 cents FY12)
Cabcharge (CAB): EPS 55.4 cents (49.7 cents FY12), DPS 36.1 cents (35 cents FY12)
Crown (CWN): EPS 61 cents (69.8 cents FY12), DPS 36.7 cents (37 cents FY12)
Devine (DVN): EPS 5 cents (–8.1 cents FY12), DPS 3 cents (4 cents FY12)
Mermaid Marine (MRM): EPS 27.3 cents (23.4 cents FY12), DPS 12.4 cents (11 cents FY12)
Lend Lease (LLC): EPS 96 cents (92.7 cents FY12), DPS 41.8 cents (38 cents FY12)
Mirvac (MGR): EPS 10.8 cents (12.2 cents FY12), DPS 8.7 cents (8.4 cents FY12)
Ramsay Healthcare (RHC): EPS 137.1 cents (112.7 cents FY12), DPS 68.7 cents (60 cents FY12)
Sims Metal Management (SGM): EPS 22.9 cents (–253.3 cents FY12), DPS 17 cents (20 cents FY12)
Village Roadshow (VRL): EPS 36.1 cents (34.4 cents FY12), DPS 22.6 cents (22 cents FY12)

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 regards to your circumstances.

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