Reflections On Recent Company Updates

This story features SUPER RETAIL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: SUL

– Better outlook for internationally exposed over domestic exposed
– Earnings growth trend intact
– Avoiding underperformance

By Greg Peel

Macquarie held its Australian corporate conference this month featuring presentations from over 100 corporations. Now that the conference has wrapped the broker has outlined various themes emerging.

Notably, there were few companies looking to offer numbers compared to past conferences, with most electing simply to provide outlooks rather than financial updates. Two companies that did provide financial updates were Super Retail Group ((SUL)) and SMS Management & Technology ((SMX)), with the result being FY14 forecast earnings cuts from the broker of 4% and 7% respectively. Perhaps that’s why others kept mum.

That said, Macquarie noted positive themes. A clear distinction was evident between those companies with international exposure and those domestically aligned.

Companies with international exposure were keen to talk of shareholder value creation and growth opportunities or strategies and, whether they be larger caps or smaller caps, they were positive in tone. This cohort included Amcor ((AMC)), CSL ((CSL)), Seek ((SEK)), Sonic Healthcare ((SHL)), BT Investment Management ((BTT)), Recall ((REC)), Goodman Group ((GMG)), Covermore ((CVO)), Macquarie Atlas Roads ((MQA)), Macquarie Group ((MQG)) and Stellar Resources ((SRZ)). Amcor, Seek and Covermore also highlighted targeted growth opportunities in Emerging Asia.

Domestic businesses, particularly those exposed to cyclical demand such as building materials, retail and media presented a variable outlook highlighting ongoing demand challenges. Companies in this group included Boral ((BLD)), Fletcher Building ((FBU)) and Super Retail. The tone was not universally negative, with the likes of Kathmandu ((KMD)), Nine Entertainment ((NEC)) and Stockland ((SGP)) more upbeat, but overall the environment is patchy, the broker concludes.

Beaten down mining services and engineering companies were able to suggest some stabilisation and an improving outlook, with new infrastructure spending providing the opportunity for new contracts for UGL ((UGL)), RCR Tomlinson ((RCR)) and Skilled Group ((SKE)).

Deutsche Bank has also followed recent company updates and believes the overall message is “reasonable”. In the wake of updates so far, the net reaction in share price and earnings forecast adjustments has been negligible, Deutsche points out, thus there’s no change to the trend of recovering earnings.

Consumer sector updates were positive on the balance, the broker notes, while housing is improving and financial companies are seeing good funds inflows. One negative comes from transport companies, which are yet to see any real sign of the economy improving.

Overall the pace of earnings revisions remains mild, Deutsche concludes, which has historically been consistent with good earnings per share growth.

Deutsche Bank has also observed from experience that stocks which have been very popular over a period, and stocks which have been very unpopular, are the stocks most likely to underperform going forward. The implication here is that popular stocks have become overbought and unpopular stocks are so for good reason. Banks remain very popular, the broker notes, domestic cyclicals quite popular and mining services very unpopular, with resources more neutral.

Deutsche suggests it might be worth looking at stocks that have now become more neutrally viewed (referencing net broker Buy/Hold/Sell ratings and their recent movements) having been previously very popular or very unpopular. This group would include Bluescope ((BSL)), Macquarie Group, National Australia Bank ((NAB)), Telecom NZ ((TEL)), Ardent Leisure ((AAD)), ANZ Bank ((ANZ)), GWA Group ((GWA)) and Woodside Petroleum ((WPL)).

Stocks moving in the opposite direction, towards popularity/unpopularity, include Echo Entertainment ((EGP)), Goodman Fielder ((GFF)), Sims Metal Management ((SGM)), Santos ((STO)) and Westpac Bank ((WBC)).

Goldman Sachs has removed Cardno ((CDD)) from its Australian Small and Mid Cap Focus list following a rating downgrade to Neutral. This list to date is down 2.1% on the prior corresponding period while the ASX Small Ordinaries Accumulation Index is down 0.9%. The best performers on the broker's list, to date, are Kathmandu, Cardno and Dick Smith Holdings ((DSH)) which delivered returns in excess of the comparative index of 4.2%, 2.8% and 1.4% respectively. The detractors from the list are Flexigroup ((FXL)), Alacer Gold ((AQG)) and Super Retail, which underperformed by 5.3%, 5.2% and 4.9% respectively. Goldman's focus list now includes Austbrokers ((AUB)), Blackmores ((BKL)), Drillsearch ((DLS)), Nine Entertainment, SAI Global ((SAI)), SFG Australia ((SFW)), SG Fleet ((SGF)), Skilled Group as well as the aforementioned.
 

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