With reporting season moving into gear this week – although not yet in full swing – there can’t be an investor who doesn’t understand that it’s not going to be pretty.
Consensus expects earnings across the market to fall by at somewhere in the range of 15%–21%, if you exclude the resources sector, which is still doing comparatively well.
The slump in earnings due to the hit from COVID-19 will be the biggest fall since the GFC. Shane Oliver, head of investment strategy and economics at AMP Capital, expects the Financials to be the hardest-hit sector, with an expected –27% slump in earnings, led by insurers and the banks, followed by industrials with a –15% fall in earnings and resources with –13%. Oliver says Health Care may be the only sector to see a rise in earnings – but hedges that by saying “even that’s iffy.”
Broker UBS expects earnings per share (EPS) to fall by 21% – the equal worst since the GFC year, of FY09 – and says the season will deliver a “dividend recession,” with dividends per share plunging by 39%. UBS also says EPS declines will be led by the Financials (–28.3%), as banks provision for bad debt charges due to the weakening economy, followed by the Industrials ex-Financials (–15.5%). Despite booming iron ore prices, the broker predicts the fall in oil and metallurgical (steelmaking) and thermal (electricity) coal prices to drag resource EPS growth to –12.9% in FY20. Only Discretionary Retail is expected to grow EPS in FY20, with UBS expecting EPS in the sector to be up 5.9%.
Fellow broker Citi also expects that dividends – upon which hundreds of thousands of retirees rely to augment their incomes – will be hammered. The research team at Citi predicts that dividends could fall by 37 per cent (from $72 billion last year, to $45 billion this year), with the biggest declines from banking stocks. This outlook has not been helped by the unprecedented ruling by the Australian Prudential Regulation Authority (APRA) that the banks – which paid out more than 80% of their profits as dividends over the past five years – must limit their dividend payout to no more than 50% of profits.
CBA is the first bank to report under this requirement: it reports on August 12. Analyst forecasts expect CBA to pay a final (second half) dividend of about 50 cents – after paying $2 in the interim (first-half) dividend. But the range of analysts’ projections for the final dividend runs from 20 cents to $1.30.
The country’s largest construction group, CIMIC, ditched its interim dividend last week
With COVID-19 changing the rules for “confession season” this year – the Australian Securities Exchange (ASX) effectively agreed with companies that they were not required to predict the unpredictable – a wide range of companies have lowered market expectations for their earnings. UBS says 49 members of the S&P/ASX 100 Index have lowered or removed guidance since 10 March. Some have upgraded, but that is uncommon.
As usual, how companies’ results are received by the market relates more to what the market expects than the actual reported number – the extent to which the market has been guided toward an expectation.
The market knows that FY20 is a write-off for company profits – the market is looking out to FY21 and FY22. It is FY22 profit projections, and valuations, that is governing the way that analysts and professional investors see companies right now.
The market will forgive awful numbers because it is looking 18 months to two years away.
The comparative strength of the resources sector – more specifically, the big iron ore miners – was shown last week with Rio Tinto’s June 30 half-year result, which showed interim profit down 20% on the same period last year. While that sounds typical of what the market expects for most companies, RIO’s underlying earnings — excluding a range of one-off costs — were down just 4%, to $US4.75 billion ($6.59 billion). Despite the profit drop, the mining giant lifted its interim dividend by 3%, to $US1.55 ($2.15) a share.
Despite copper and aluminium prices falling significantly, iron ore held up well: prices were up 1% on a year earlier on the back of strong demand from Chinese steel mills.
Fortescue Metals Group should follow-up this strength in iron ore when it reports later in the season. FMG has already updated the market that it shipped a record volume of iron ore in the June 30 year, generating record revenue. FMG beat its export guidance over the past year, with shipments of 178.2 million tonnes, a 6% lift on last year.
In the three months to the end of July Fortescue shipped an annualised tonnage of 189 million tonnes, and the company expects to ship 175 million–180 million tonnes in the current financial year. Australian iron ore exports hit a record $9.9 billion in June and more than $100 billion in the financial year, with China taking 87% of the shipments.
More importantly, Fortescue had a cash production cost of US$13.02 for the quarter, and an average of US$12.94 over the financial year. But it realised an average US$81 a tonne for the June quarter, 86% of the average benchmark price for 62% iron ore, bringing average prices to US$79 a tonne for the financial year. That’s why analysts expect a big final dividend, of up to $1, which would be a 40-cent lift on last year.
Discretionary retailers, too, could surprise on the upside as once-removed beneficiaries of government stimulus (JobKeeper and the extended JobSeeker). For example, Super Retail Group – whose chains include Super Cheap Auto, Rebel Sport, Macpac and BCF – recently reported stronger-than-expected sales in the last quarter of FY20, as consumers spent up on sports gear, gym equipment and car projects.
Super Retail now expects total revenue for FY20 to be $2.82 billion, up from $2.71 billion in 2019, EBITDA (earnings before interest, tax, depreciation and amortisation) of $327 million–$328 million, up from $315 million in 2019, and normalised net profit of $153 million–$154 million, compared to $153 million in 2019.
In a similar vein, personal grooming retailer Shaver Shop (SSG) withdrew its FY20 earnings guidance – for earnings before interest, tax, depreciation and amortisation (EBITDA) of $14.25 million– $15.75 million, compared to $13.5 million in FY19 – in March, and took back its already announced interim dividend of 2.1 cents a share, 80% franked, given what it said was “the need to preserve cash over this period”.
But buoyant trading – particularly online – has seen SSG recover to the point where it has reinstated its interim dividend.
In contrast, AMP warned last week that its first-half profit would more than halve, as more than $4.4 billion flowed out of its wealth management arm in the first half alone. Average assets under management fell by 6% over the half, to $126 billion. AMP said it expected to post a net profit of between $140 million–$150 million for the first half, down from $309 million a year ago.
Broker Wilsons sees potential good news this earnings season coming from ARB Corporation, A2 Milk, Nick Scali, SomnoMed, Bravura Solutions, NRW Holdings and Perenti Global. It says companies that have to do very well to meet the guidance the market is expecting from them include AMA Group, AP Eagers, Costa Group, Whitehaven Coal, New Hope and Monadelphous.
Wilsons says potential downside surprises could come from GUD Holdings, Ramsay Health Care and Nanosonics.
Goldman Sachs is expecting good results from QBE Insurance, Suncorp, Computershare, Pendal Group from the financial sector, as well as A2 Milk, AP Eagers, AGL Energy, Superloop, Afterpay (not in profit but in transaction and merchant numbers), Amcor and Domino’s Pizza.
The broker doesn’t like ASX, Platinum Asset Management and Medibank Private.
Broker Morgans thinks Telstra could surprise positively (more in terms of capital management than profits), while it is very wary on Ramsay Health Care, Link Administration, Orora, Qube Holdings, Coca-Cola Amatil and Woodside Petroleum (half-year).
On Thursday, we will hear from sleep treatment medical device giant ResMed, which is one of the few ASX-listed stocks to be a clear beneficiary of COVID-19. Demand for ResMed’s ventilators has surged: in the March quarter, ResMed tripled its ventilator production, producing more than 52,000 units in order to fulfil an urgent contract from the Australian Government. The company went on to provide around 5,500 invasive and non-invasive ventilators to Australia’s national stockpile. ResMed was one of the six companies named to help facilitate the production and supply of ventilators in the United States after the country initiated its Defence Production Act.
In late April, ResMed announced its results for the third quarter of 2020, which was highlighted by a 16% increase in revenue to US$769.5 million, a 39% increase in net operating profit, to US$217.5 million, and a gross margin of 58.4% for the quarter.
For the June 30 year, analysts (on consensus) expect a 65% boost to earnings per share (EPS), in US dollars – but despite being a potential star of earnings season, analysts view the stock as over-priced, with a consensus price target, according to FNArena, of $25.10, versus the current share price of $28.28.
Insurance heavyweight IAG (IAG) will demonstrate the earnings pain from the Financials sector, when it reports on Thursday: FNArena’s consensus has earnings per share (EPS) falling by 55% in FY20, to 16.8 cents. Then, in FY21, analysts see an 84% rebound, to 30.9 cents. But IAG could be a buy: against a market price of $5.09, FN Arena has an analysts’ consensus target price of $5.929, while Thomson Reuters has $5.98.
Thursday also sees resources-industry and regional aviation business Alliance Aviation (AQZ) report, and that could also produce a rare earnings rise: FN Arena’s consensus of analysts’ estimates projects earnings per share (EPS) of 20.6 cents for FY20, actually up on FY19, by 1.9 cents (10.3%). However, the pain at Alliance will be in the dividend, which is expected to be more than halved, to 6.5 cents.
I looked at AQZ in January as one of three industrial stocks for yield [1] – at that stage, it was trading at $2.75. It has moved to $3.34, but the dividend cut puts paid to the yield scenario that analysts were expecting earlier in the year. FN Arena has an analysts’ consensus target price of $3.663, while Thomson Reuters’ collation has AQZ at $3.54.
On Friday, property website listings company REA Group (REA) reports, and while FN Arena’s consensus of analysts’ estimates expects a 10% fall in EPS, to 201.3 cents, with that decline more than recovered in FY21, with growth to 241 cents expected. REA is also considered over-priced, at $108.48 compared to an analysts’ consensus target price of $101.022.
Friday also brings what could be one of the stronger results from the season, when baby goods superstar Baby Bunting (BBN) reports. Baby Bunting withdrew its profit guidance in March due to uncertainty created by the coronavirus pandemic, but in a trading update in July, BBN said it expected underlying net profit to rise between 29%–35% in FY20, to a range of $18.5 million–$19.5 million. That was slightly lower than previous profit guidance of $20 million–$22 million.
Unfortunately for investors, FN Arena’s collation has analysts posting a consensus price target of $3.50 for Baby Bunting, underneath the share price of $3.57; Thomson Reuters has a consensus valuation of $3.70. The stock’s low at the depths of the COVID Crash was $1.53.
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