Australian Earnings Season: Disappointment And Risk

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED, and other companies. For more info SHARE ANALYSIS: ERA

By Greg Peel

The strategists are RBS Australia had flagged that there may be downside risk to consensus FY12 earnings forecasts going into the recently completed (but for a few outliers) Australian corporate earnings season, but even they were surprised by the severity of some downgrades. The biggest culprit was the strong Aussie dollar.

Given the Aussie has remained stronger for longer, investors may be forgiven for wondering why stock analysts got their forecasts so wrong. But the bottom line is that analysts have simply been expecting the Aussie to retreat on a stronger US economic story and a slowing of the Chinese economy. They are now reassessing, and it is in that vein that Macquarie this week has substantially upgraded its year-end Aussie forecasts. FY12 moves from US$0.93 to US$1.10.

RBA has noted from post-season consensus forecasts that FY12 earnings forecasts have been downgraded by 3.4 percentage points. While revenue growth is expected at 6.6% for FY12 in total, only 2.5% earnings growth is now expected. This highlights margin contraction, and while the banks suffered from lower net interest margin expectations it was the resources sector which really felt the pain. The Aussie has strengthened even as commodity prices have soured and at a time of substantial capex, cost inflation is really hurting. The Aussie impact was also felt across other sectors.

Mining and engineering service companies were the stand-out positives, which is no great surprise. They are benefitting significantly from the aforementioned capex increase, can pass on cost and currency increases, and pay high yields – the later being of great attraction of offshore investors.

RBS notes, nevertheless, that the response to the season's disappointment was not that negative. Poor performing discretionary retailers were saved by private equity sniffing around, but beyond that RBS had expected a “look-through” towards FY13 given the recent apparent resolution in Europe. Consensus forecasts have revenues growing in FY13 by 7.7% but earnings by 15.7%, which suggests margin improvement ahead.

The consensus levels would have been taken prior to Macquarie's index-wide round of earnings downgrades, however, in the face of its new Aussie dollar forecasts. Macquarie's FY12 earnings growth forecast is now minus 0.2%, with plus 13.6% expected for FY13. That's down 6.9 percentage points since the currency change.

Macquarie has argued that the Aussie will now stay stronger for much longer (above parity out to 2015) due to Australia being an attractive destination for offshore investment in bonds, yield stocks and other assets, rather than just being the old “commodity currency”. (See yesterday's The Aussie: Still Just A Commodity Currency?) Macquarie has the “market” forecast for FY13 earnings growth at 16.9% which is 3.3 percentage points above its own forecast. The strategists thus see downside risk to consensus seeing as the “market” is basing its forecasts off an FY13 average Aussie of US$1.01 while Macquarie has upgraded to US$1.10.

Macquarie's currency upgrades have flowed through to some significant earnings forecast changes among stocks under coverage. The biggest downgrades were seen for ERA ((ERA)), Panoramic ((PAN)), Bluescope ((BSL)), Paladin ((PDN)) and Whitehaven Coal ((WHC)). The only stocks to benefit are Qantas ((QAN)), Virgin ((VAH)) and Boral ((BLD)).
 

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