Rudi’s View: August, It’s A Joke

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In this week's Weekly Insights

-August: It's A Joke
-September Index Reviews
-Conviction Calls

By Rudi Filapek-Vandyck, Editor FNArena

August: It's A Joke

Corporate reporting season in Australia; in most investors' mind that is only February and August, every year.

In practice, however, the bulk of companies tends to release its market update in the second half of each month, so we might as well call it the second-half-of-August reporting season.

I am not even exaggerating, not by the slightest. When the team at FNArena started updating the Corporate Results Monitor, some eight years ago now, we had to account for a lopsided schedule from day one, but -for reasons unknown- things have only grown even more lopsided since.

From memory, eight years ago we'd end up with some 100 companies having reported by mid-month, which meant there were a further 150-plus left for the closing two weeks of the season. The numbers have since gradually become slimmer and slimmer for the first two weeks, and thus larger and larger for the second half. Also because the stockbrokers we monitor have broadened their coverage over time.

Four years ago, we'd have 80-plus companies in the Monitor by mid-month. Last year that number had shrunk to a little over 50. This time around we ended up with 44. At this pace -dropping -50% in four years- we might as well shorten the whole season to two weeks only from next year onwards. Nobody's going to notice the difference!

Post-2018, my suspicion had been this shift to reporting later in the season was due to more and more local companies having to report bad news for shareholders. If it wasn't a big miss on forecasts, it'd probably involve a capital raising, or a dividend reduction, or a large write-down (non-cash, thus not-so-bad).

But if this were the case over the past three years, businesses clearly do not feel optimistic or confident enough to pull forward the timing for their financial results release. See the numbers this year. Or maybe this is simply a case of: it'll never revert back to a more spread-out scheduling worthy of its common label.

Once we've created a new habit, maybe there is no turning back from it.

Is two weeks long enough to talk about a results "season"?

What this lopsided scheduling does prevent is the ability to draw in-depth, far-reaching conclusions at the half-way point. By early September we expect to have covered off on circa 350 companies. So far, we have hardly scratched the surface in terms of numbers.

Hence, it's getting busy from here onwards. I do not precisely know what the coming two weeks might bring, nor what the exact impact will be on writing Weekly Insights on the coming two Mondays.

I'll do my best.

Meanwhile, I happily refer to my previews and early observations from the past three weeks:

-Early Days, But Plenty Of Signs

https://www.fnarena.com/index.php/2021/08/12/rudis-view-early-days-but-plenty-of-signs/

-August Bonanza, But What's Next?

https://www.fnarena.com/index.php/2021/08/05/rudis-view-august-bonanza-but-whats-next/

-August Results: Anticipation & Trepidation:

https://www.fnarena.com/index.php/2021/07/29/rudis-view-august-results-anticipation-trepidation/

Here is the link to the FNArena Corporate Results Monitor (from now on updated daily):

https://www.fnarena.com/index.php/reporting_season/

September Index Reviews

Inclusions and exclusions for a leading share market index can have quite the noticeable ramifications for share prices, in particular for small caps throughout the immediate market response.

Past data analysis by Morgan Stanley shows the most pronounced impact usually involves the ASX200. Fresh inclusions tend to outperform the broader market by 7.4% over the twenty days prior to the announcement made at a success rate of no less than 81%.

Index changes can equally have a rather large affect on stocks inside the Small Ordinaries as the pending removal of Orocobre ((ORE)), for instance, can shake-up the sector weights in the index. Australia's pre-eminent producer of lithium can potentially be elevated to the ASX100, which implies automatic removal from the Small Ordinaries (and thus from every institutional portfolio with a mandate of only investing in small caps).

Spin-offs and mergers and acquisitions are playing a major role ahead of the upcoming index rebalancing review, think Woolworths-Endeavour, but also Orocobre-Galaxy Resources and acquisitions of Vocus and Bingo Industries, and we may as yet hear more from Sydney Airport, Iress, Tabcorp, AGL Energy, as well as from Afterpay, Santos/Oil Search, BHP Group and others.

M&A activity is so busy these days, I might have forgotten a few. a2 Milk is also rumoured under corporate interest.

Analysts at Morgan Stanley, for their part, believe both ResMed ((RMD)) and Seek ((SEK)) might be entering the ASX50 next month with a2 Milk ((A2M)) and Ampol ((ALD)) expected to lose their spot. There is a chance that Tabcorp ((TAH)) might also replace AGL Energy ((AGL)) but this scenario is seen as a lower probability.

It is remarkable in itself there are so many changes expected for what is traditionally a rather stable index, as is the ASX20, soon to be upended by the acquisition of Afterpay. See also Wilsons' predictions further below. Both the ASX50 and the ASX100 will lose one more stock than can be added because of Woolworths spin-off Endeavour Group ((EDV)).

The ASX100 is expected to lose Boral ((BLD)) and maybe Beach Energy ((BPT)) too. Only in the second scenario are Orocobre and Steadfast Group ((SDF)) seen as potential replacements.

As flagged earlier, the most important changes tend to involve the ASX200 and here NRW Holdings ((NWH)), G8 Education ((GEM)), Westgold Resources ((WGX)) and Spark New Zealand ((SPK)) are all considered prime candidates to be booted out in a few weeks' time, with Nuix ((NXL)) and Omni Bridgeway ((OBL)) not out of the question either.

Considered potential candidates to fill up the looming vacancies are Pinnacle Investment Management ((PNI)), Lifestyle Communities ((LIC)), SeaLink Travel Group ((SLK)), De Grey Mining ((DEG)), and potentially Imugene ((IMU)) and Event Hospitality & Entertainment ((EVT)).

All changes are to be announced on Friday, September 3 and changes will kick in after the close of trading on Friday, September 17th.

Analysts at Wilsons have a few different scenarios on their mind. While admitting such an outcome remains unlikely, they nevertheless have been toying with the idea the ASX20 might be ripe for a true shake-up that could see each of Coles ((COL)), Newcrest Mining ((NCM)) and Brambles ((BXB)) removed in favour of Xero ((XRO)), Sonic Healthcare ((SHL)) or James Hardie ((JHX)).

More probable, in Wilsons' view, is that BlueScope Steel ((BSL)) will be added to the ASX50, with Seek seen as a possible candidate, and ResMed and Evolution Mining ((EVN)) as lesser probability additions. Those biding their time, apparently, are a2 Milk, AGL Energy, possibly Ampol, and to a lesser extent Aurizon Holdings ((AZJ)) and Origin Energy ((ORG)).

Wilsons has other candidates for the ASX100 too with Steadfast Group seen as a potential inclusion and Seven Group ((SVW)) and Iluka Resources ((ILU)) as less likely options. Those about to be dropped are Beach Energy, probably, Boral potentially and Link Group ((LNK)) and Orora ((ORA)) under less likely scenarios.

For the ASX200, Wilsons shares some of the same favourites for inclusion as Morgan Stanley; Pinnacle Investment Management, SeaLink Travel Group, De Grey Mining and Event Hospitality & Entertainment, but then Piedmont Lithium ((PLL)) is also considered a valid candidate, with a lesser probability given to Lifestyle Communities, Tyro Payments ((TYR)), Arena REIT ((ARF)) and Sandfire Resources ((SFR)).

Prime candidates to be booted out include Nuix, NRW Holdings, G8 Education, and Westgold Resources, with Spark New Zealand a possibility. Might retain their inclusion, according to Wilsons, but are certainly seen as a potential exclusion: Omni Bridgeway, Kogan ((KGN)), Nearmap ((NEA)), and Redbubble ((RBL)).

Wilsons equally sees a list of changes taking place for the ASX300 where Bubs Australia ((BUB)), Synlait Milk ((SM1)), Integrated Research ((IRI)), Maca Ltd ((MLD)), Medical Developments International ((MVP)), and Humm Group ((HUM)) are all considered future index orphans, with SSR Mining ((SSR)) a potential candidate too.

Could well be removed too, but are likely to retain their membership, at least for now, are AMA Group ((AMA)), AACo ((AAC)), Jupiter Mines ((JMS)), Alkane Resources ((ALK)), and Carnarvon Petroleum ((CVN)).

Most likely candidates to fill the voids include Paladin Energy ((PDN)), Imugen, Liontown Resources ((LTR)), Betmakers Technology Group ((BET)), Dubber Corp ((DUB)), PPK Group ((PPK)), Novonix ((NVX)), Johns Lyng Group ((JLG)), Strike Energy ((STX)), and Australian Strategic Materials ((ASM)).

Syrah Resources ((SYR)) could be added too but is given a lower probability, with an even lower probability ascribed to Jervois Mining ((JRV)), Vulcan Energy Resources ((VUL)), HomeCo Daily Needs REIT ((HDN)), PWR Holdings ((PWH)), as well as Adriatic Metals ((ADT)).

Conviction Calls

I think the following quote from US equity strategists at Citi is self-explanatory:

"… despite bumping our numbers higher (belatedly), we are in the broader 10% correction camp with a reminder that seasonally, September is not the best month to be invested in the S&P 500".

Citi analysts have been blown away by the manner in which corporate America managed to grow profits, once again beating market expectations with gusto, but they also believe valuations have limits:

"…we do not anticipate an equity collapse though we suspect that the combination of higher taxes (tied to a reconciliation bill this year), potentially more persistent inflation, Fed taper talk and possible margin compression all support the probability of a correction."

Citi analysts also emphasise this is all they are talking about: a correction. Not a collapse, and neither is a new bear market imminent, in their view.

Market strategists at Morgan Stanley expressed a similar view recently.

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No changes made means Morgan Stanley's Australia Macro+ Focus List still comprises of ten stocks:

Ansell ((ANN)), APA Group ((APA)), BlueScope Steel, Downer EDI ((DOW)),Qantas Airways ((QAN)), QBE Insurance ((QBE)), REA Group ((REA)), Scentre Group ((SCG)), Telstra Corp ((TLS)), and Westpac ((WBC)).

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One change was made to Wilsons' list of Conviction Calls in the removal of Whispir ((WSP)) due to a too high level of uncertainty.

Have thus been retained: ARB Corp ((ARB)), Collins Foods ((CKF)), Pacific Smiles ((PSQ)), Aroa Biosurgery ((ARX)), ReadyTech ((RDY)), and Plenti ((PLT)).

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Analysts at Morgan Stanley remain in awe of favourable market dynamics for BlueScope Steel ((BSL)), expecting a very strong FY21 performance but equally a better-than-priced in guidance for FY22 which should extend the stock's positive momentum.

Their outlook for Boral is the exact opposite as the company's share buyback is about to end while suitor Seven Group has achieved its goal and will therefore not continue to support the share price now that the offer to acquire Boral shares has not been extended beyond the July 29 deadline.

Morgan Stanley suspects once the market's focus returns to Boral's operations, the balance of risk reverts to the downside.

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(This story was written on Monday 16th August, 2021. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website).

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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