August Reporting Season: Early Indications

This story features RESMED INC, and other companies. For more info SHARE ANALYSIS: RMD

By Rudi Filapek-Vandyck, Editor FNArena

Things ain't so bad in corporate Australia. Not as bad as feared by some.

Certainly, the local reporting season is giving plenty of reasons for a general uptick in optimism. There are mumblings here and there about a trough in earnings. Throw in rising expectations for miners and de-risking profiles for oil and gas producers and there is a fair chance the FY13 reporting season can become a positive turning point for the Australian share market.

As per usual, the opening shots to this year's financial reporting season have seen positive surprises being offset by some big disappointments. Stand-out performers on the positive side, thus far, include ResMed ((RMD)), JB Hi-Fi ((JBH)), Flexigroup ((FLX)) and Henderson Group ((HGG)).

Noticeable disappointments were delivered by Computershare ((CPU)), Wesfarmers ((WES)), Cochlear ((COH)) and Leighton Holdings ((LEI)). And there were more questions than usual post results released by Carsales.com ((CRZ)) and REA Group ((REA)).

Companies that have reported so far only represent circa 33% of the Australian share market's market capitalisation, so it remains early days still. But it's difficult to not notice how the undertone has become one of general optimism instead of despair and uncertainty.

Market strategists at Citi already have seen enough to reiterate their 5600 target for the ASX200 by June next year, suggesting another year of double-digit investment returns for the Australian share market, consisting of 9% in share price appreciation plus dividends.

In terms of EPS growth averages, it would appear upgrades and downgrades are keeping each other in check thus far (admittedly after weeks of heavy downgrades leading into this season). If we can assume that things won't materially change over the next two weeks then FY13 might turn out to be a year of mild negative growth, but only because of heavy losses reported by resources companies. Overall, estimates for FY14 are staying above 10% growth carried by projected improvement for miners and energy producers, while industrials and banks should continue adding growth for shareholders.

Also remarkable is that resources are no longer the prime growth sector in the market, not even after the disastrous past two years, with EPS growth for sectors such as Building Materials, Transport and Healthcare projected to dwarf whatever the producers of iron ore, natural gas and other base materials are likely to offer their shareholders in the year ahead.

Most resources stocks, especially the smaller and mid-tier companies, are still available at a relative valuation discount.

Below is a sector overview as released by Citi analysts on Monday, showing the changes in analysts' forecasts that have taken place over the past month as well as where the big growth numbers are situated for the year ahead.
 

In terms of individual highlights, the following stand-outs caught my eye:

SAI Global ((SAI))

This provider of business services to assist its customers with managing risk, achieving compliance and driving operational improvement used to command a valuation premium and shareholders were happy to remain on board for the longer term, because SAI Global had become synonymous for "healthy, robust, reliable returns". Until a few years ago the house of cards crumbled and it has been an excruciating wait since.

During my research into All-Weather Performers, SAI Global featured high on my potential targets list, but it was not to be. Too many flaws and disappointments and too many failings from company management. I'd be surprised if SAI Global was still on the radar of many investors, both retail and professional.

But as we all know, this is the perfect recipe for the sudden come-back and if analysts' responses post the company's recent FY13 report can be relied upon, SAI Global should now be considered the next Come Back Kid in the Australian share market. Analysts at Goldman Sachs even went as far as elevating the stock to their Conviction List.

Sure, problems in the Compliance business are likely to persist for longer, say analysts in broad agreement, but it would appear there's now enough strength in the rest of the operations to start building towards a re-rating for the stock. No less than four out of seven brokers in the FNArena database upgraded to Buy (or equivalent of) and Goldman Sachs is not included in this list. Not surprisingly, the share price has recorded a big jump, from circa $3.40 to $4.40, so the easy gains have gone.

Royal Wolf Holdings ((RWH))

I have written about this company in the past. Royal Wolf does containers better than anyone else throughout Australia and New Zealand and in multiple formats and usages, not just for storage and shipping. The company only listed on the ASX in May 2011 and is therefore still relatively unknown amongst investors in Australia. My main concern in the past were the tepid trading volumes which means investors can only invest in small amounts and run the risk of getting trapped in what still is a relatively young story. But daily trading volumes are becoming more attractive and broker opinions are still overwhelmingly positive.

Royal Wolf should have an absolute cracker of a growth year in FY14, which brings with it potential for not meeting high expectations. This stock has the potential to become a future market darling and the recent FY13 report showed just that. Watch investor interest grow as management continues to deliver on its potential.

Royal Wolf shares are not cheap, but there's one solid, straightforward remedy for this: keep up the growth and keep the eyes open for the next acquisition.

Amcom Telecom ((AMM))

Perth-based Amcom is a play on fibre (broadband traffic) and cloud services and recent FY13 financials have convinced enthusiastic stockbroking analysts even more this company looks poised to grow its EPS by double-digits (say circa 20% per annum) for several more years to come. Amcom's strong FY13 performance follows on from similar performances in recent years, so many investors are by now well aware of this growth story. This means you probably won't be able to buy this stock on the cheap, at least not in the short to medium term (unless global disaster strikes).

If management continues to deliver, however, Amcom's share price will continue to post additional gains in the years ahead. So what to do? Make sure you get on board at a share price that doesn't look too expensive and trust in management's ability to leverage off the natural benefits from a fibre infrastructure and growing demand for cloud services. Such investment strategy would have worked like a song in the years past.

Wesfarmers ((WES))

Cynics might say this is not the first time stockbroking analysts have questioned the likely growth path ahead for conglomerate Wesfarmers and it is only fair to say the doubters have been proved wrong in past years, but I have personally not witnessed such a general sense of disappointment as after the release of Wesfarmers' FY13 report this month. If we exclude BA-Merrill Lynch, who has now become a lone wolf in the desert on Wesfarmers' outlook and valuation, we can only conclude that a general sense of "the worm is turning" has started to dominate analysts' perception of Wesfarmers.

The story of Wesfarmers is rather typical for the 30% of stocks that has done all the work to push the indices into double-digit gains territory: the PE multiple looks a bit rich. If resources stocks and other cyclicals now start attracting a larger chunk of investment flows then share price weakness for the likes of Wesfarmers is but to be expected. If, however, broker scepticism proves accurate and EPS growth will slow down materially, then a de-rating might be on the cards and that might hurt a lot more. Certainly a noticeable turn in sentiment and one that should be on every investors radar, even if not a shareholder in the company.

Wesfarmers won't be the only one in such position post this reporting season.

(This story was written on Monday, 19 August 2013. It was published in the form of an email to paying subscribers on that day).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website)

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THE AUD AND THE AUSTRALIAN SHARE MARKET

I have been researching and writing an eBooklet titled "The AUD and the Australian Share Market". From late July onwards this eBooklet has become part of the bonus package that comes with a 6 or 12 months paid subscription to FNArena. If you are not as yet a paying subscriber, maybe now's the time to consider joining?

My previous eBooklet (see below) is also still included.

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DO YOU HAVE YOUR COPY YET?

At the very least, my latest e-Booklet "Making Risk Your Friend. Finding All-Weather Performers", which was published in January this year, managed to accurately capture the Zeitgeist.

All three categories of stocks mentioned in the booklet are responsible for the index gains post 2009 and this remains the case throughout 2013.

This e-Booklet (58 pages) is offered as a free bonus to paid subscribers (excl one month subs). If you haven't received your copy as yet, send an email to info@fnarena.com

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Rudi On Tour

– I will present later this week at the Trading & Investing Expo in Melbourne, August 23-24 (where FNArena will host a booth) – title of my presentation is "What Works In The Share Market?" – Ticket Promotion: click here for free entry ticket – promo code = FNArena

– I will present to members of AIA NSW North Shore at the Chatswood Club on Wednesday 11 September, 7.30-9pm

– I have also accepted an invitation to present to ATAA members in Canberra in late November

– I might give my final presentation for the year at the ASA's Sydney Investor Hour in December

Click to view our Glossary of Financial Terms