With the Aussie share market at 10-year highs, there is no doubt that this coming company earnings season needs to be good for the market to push materially higher.
Just as in the USA, where so much focus and analysis is placed on company earnings, Australian share prices are ultimately about earnings and expected earnings, and if these aren’t growing, share prices struggle to rise. And whereas the US goes through four earnings seasons each year, we only have two periods in Australia, so arguably, they are even more important.
While there are other times that companies report, about 80% of Australia’s ASX listed companies have either a 30 June or 31 December balance date. This means that they are required to report their profit for the half year or full year in February and August each year, leading to two concentrated “earnings seasons”.
At a macro level, company earnings for the full year ending 30 June are expected to rise by around 7% on 16/17. According to AMP Capital’s Shane Oliver, resource companies are expected to show profit increases of around 20%, benefitting from the impact of higher commodity prices in the first half and a firmer oil price. The non-resources sector is only expected to boost profits by around 4.5%, dragged down by the performance of the banks, which are expected to be largely flat.
In terms of the schedule, reporting season starts slowly with only five leading companies expected to report this week. Rio Tinto is the big one – after the market close on Wednesday. It picks up pace in the second week, building to an avalanche of reports in the fourth week (20 August to 24 August) before tailing away in the final week and the deadline of 31 August.
Schedule for leading companies by week (source CommSec)
What to expect
Confession season, which is the period leading up to earnings season, has been pretty light on. This occurs ahead of the publication of the full results and is the time when companies “fess up” to an expected poor profit outcome. Due to continuing disclosure obligations, companies are required to tell the market as soon as they become aware of anything that could have a material impact on the share price. By the end of June, most companies have a pretty good handle on how they will land, and in 2018, there haven’t been that many confessions. This is a positive sign.
The outlook statement will, in many cases, be more important than “historic” earnings. While markets will want to see how a company performed compared to the forecast, and understand the reasons for a “beat” or a “miss”, share prices are about future earnings, not past earnings. A company that meets forecasts, but is subdued or cautious in its outlook statement, is likely to be sold down.
Not all companies provide forward profit guidance or issue definitive outlook statements. Those that do are much easier to assess because the market will have a forecast for next year’s profit, dividend and top line sales growth. Companies that don’t, such as the Commonwealth Bank, will be judged on the tone of the presentation to analysts, warnings about risks and actions they take such as the confidence displayed in increasing the dividend or returning capital to shareholders.
Misses by so-called “growth” companies will be severely punished. Because the market has placed such a high premium on “growth” over the last 12 to 24 months, elevating companies such as CSL, A2 Milk, Treasury Wine Estates and the technology companies to very high multiples, there is little tolerance for a hiccup.
With many priced “close to perfection”, they need to deliver in order to sustain an upward trajectory. The market won’t be forgiving if they miss. Conversely, some of the “value” companies, which have been quite badly beaten up, may get a boost if they deliver on expectations or marginally surprise on the upside.
Finally, it needs to be a good season to sustain the market’s momentum.
Key companies to look out for
Some of the key companies and their expected reporting dates are set out in the table below.
Reporting dates for some key companies
They will be a litmus test for the tone of the reporting season. Here is what I am looking for in each case.
1. The big miners – RIO and BHP
RIO will be the first major company to report this season. It is due after the market close on Wednesday, and with a December 31 balance date, will be for the half year. BHP’s full year report is due on Tuesday 21 August.
For the big miners, the focus won’t be on the “numbers” per se but rather what they are doing with the cash they are generating and additional progress they have made in reducing the costs of production. Will the cash translate into higher dividends and/or further buybacks? Following the sale of its US onshore oil and gas assets to BP for US$10.8 billion, is BHP ready to announce how this will be returned to shareholders – perhaps in part through an off-market buyback?
2. Commonwealth Bank
Commonwealth Bank is the first of the banks to report on Wednesday 8 August. While the market is not expecting anything too remarkable – full year cash profit down marginally to $9.6 billion and an unchanged final dividend of $2.29 – with new CEO Matt Comyn delivering his first set of results, there could be a surprise or two. Key things to watch out for are the extent of any downward pressure on the net interest margin and progress (or not) in reducing non-compliance operating costs.
3. JB Hi-Fi
Following challenges with its Good Guys business, JB Hi-Fi reduced full year profit guidance in May from a range of $235 million to $240 million to around $230 million. It maintained its full year sales forecast of $6.85 billion. Arguably Australia’s best retailer, it is also the first to report on Monday 13 August. Given the recent soft data on retail turnover and the entry of Amazon, key things to watch will be the sales performance and any tightening of margins.
4. Telstra
Telstra has guided to full year EBITDA for this year at “the bottom end” of $10.1 billion to $10.6 billion, total income “in the middle” of $27.6 billion to $29.5 billion and an unchanged final dividend of 11c (22c for the full year). Looking ahead to FY19, it has guided to EBITDA to fall to $8.7 billion to $9.4 billion and income to fall to $26.6 billion to $28.5 billion.
Today, it announced a new organisational structure. When its full year result is announced on Thursday 16 August, are there more changes in the wings? Could a positive surprise beckon?
5. A2 Milk and WiseTech Global
Both companies are high flyers, trading on big multiples, and due to report on Wednesday 22 August. Their reports will need to be spot on otherwise misses will be punished.
A2M has already reported revenue grew by 68% in FY18 to an unaudited $922 million and an EBITDA to sales ratio of approximately 30%. Forecasts for FY19 will be keenly reviewed.
WiseTech upgraded guidance in May to revenue growth of 37% to 43% on FY17 to total revenue of $210 million to $220 million, and EBITDA growth of 32% to 39% on FY17 to EBITDA of $71 million to $75 million.
6. Ramsay Health Care
Ramsay downgraded guidance in June from growth in core earnings per share (EPS) from a range of 8% to 10% to a range of 7% to 8%. This translates into core NPAT for the full year of around $585 million.
With Ramsay commenting in its June trading update that it “expects operating conditions in both the UK and Australia to remain challenging”, its outlook statement and guidance for FY19 will be critical. Also, analysts will be closely reviewing the treatment of costs and the quality of the result composition. Ramsay is due to report on the penultimate day, Thursday 30 August.
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.