All Eyes On Local Reporting Season

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– All Eyes On Local Reporting Season
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All Eyes On Local Reporting Season

By Rudi Filapek-Vandyck, Editor FNArena

Corporate profit reports in Australia are about to come through thick and fast.

Usually I write a detailed analysis before it all gets started, but this year I have chosen to line up expert insights and predictions from the major investment bankers and stockbrokers in the country.

This will allow us to revisit after the dust has settled in September.

Firstly, a quick overview of the general reporting season analyses that have been released prior to August:

If you'd ask strategists at UBS, they'd be inclined to answer that a rather tough outlook for profits in Australia is going to act as a ceiling on the upside potential for the share market as a whole. As such, UBS is not part of the 6000 club, projecting the ASX200 around 5800 by year-end and only at 6000 by June next year.

The dominant themes this reporting season, according to UBS, will be:

– top line growth versus further cost-out achievements;
– more evidence of increasing competition in key sectors such as consumer staples and general insurance;
– ongoing profit tailwinds from the booming housing market;
– banks sector response to higher regulatory requirements

Over at Macquarie, the strategists agree with UBS in that achieving profit growth remains a challenge for corporate Australia, even if we exclude miners, energy stocks and their contractors and services providers. Macquarie too believes that because of this profit challenge, investors should have rather benign expectations regarding further share market performance.

The persistent low growth environment will keep investors' focus on which companies can actually grow via increasing revenues and which companies are investing for future growth, predicts Macquarie.

The strategists nominate Seek ((SEK)), Transurban ((TCL)), Ramsay Healthcare ((RHC)), Healthscope ((HSO)), Lend Lease ((LLC)), Qube Logistics ((QUB)), Domino's Pizza ((DMP)) and Mantra Group ((MTR)) as potential stand-outs this reporting season.

For others, including QBE Insurancce ((QBE)), Woolworths ((WOW)), Metcash ((MTS), Aurizon ((AZJ)) and Origin Energy ((ORG)), the sole growth achievable will be through cost cutting.

Macquarie will also be watching any signs that dividend growth might come under pressure as this might force companies to ramp up their investments (to secure future growth) and this would be beneficial to the economy overall.

Strategists at Deutsche Bank, on the other hand, seem extra-motivated to highlight the positives. Earnings estimates might have fallen prior to August, but it hasn't been as bad as prior to February. There have been fewer profit warnings. The Aussie dollar has weakened. Industrial margins should be at or near or past their bottoms.

Plus there is a large queue of beaten down stocks that might be ripe for a relief rally.

Deutsche Bank has selected a small group of stocks that looks ripe for upside surprises; AGL Energy ((AGL)), Asciano ((AIO)), Echo Entertainment ((EGP)), James Hardie ((JHX)), QBE Insurance ((QBE)) and ResMed ((RMD)). The latter has by now confirmed through a better-than-expected Q4 market update.

Stocks likely to disappoint in Deutsche Bank's view include Amcor ((AMC)), Brambles ((BXB)), Computershare ((CPU)) and Downer EDI ((DOW)).

Strategists at Morgan Stanley represent the exact opposite of Deutsche Bank's unbridled optimism, they take a glass half-empty approach, believing many companies meeting expectations will do so on low quality trajectories and guidances will be cautious rather than optimistic. Morgan Stanley predicts near misses will see sharp share price responses.

Key themes to watch, according to Morgan Stanley, will be:

– Banks and capital headwinds while market consensus appears pretty sanguine about challenges from a slow going economy;
– Consumer seems to fizzle rather than sizzle post government budget;
– Can high PE stocks keep their momentum?

In addition, Morgan Stanley strategists have identified five stocks/micro-themes that have the ability to make or break this reporting season:

– CSL's ((CSL)) guidance is regarded key for fully valued defensive growth stocks, not in the least the healthcare sector;
– CommBank ((CBA)) might raise capital, suggest the strategists, with flow-on consequences for banks in general;
– Origin Energy and South32 ((S32))- both are working hard to overcome sector hurdles. How forgiving can the market be?
– Coca Cola Amatil ((CCL)) and AGL Energy ((AGL)) – what value for growth through cost outs?
– JB Hi-Fi ((JBH)) – the strategists believe with competition wars scarring staples, JB Hi-Fi is now the stockmarket barometer for consumer stocks

Over at stockbroker Morgans, cautious is and remains the key word, with the share market expected to remain in a sideways channel for a while and with the August reporting season to remain "unspectacular" on just about every possible metric.

Morgans has selected Domino's Pizza ((DMP)), Qantas ((QAN)), Healthscope ((HSO)) and Harvey Norman ((HVN)) for potential positive surprises while selecting Carsales ((CAR)), Transpacific Industries ((TPI)) and Woodside Petroleum ((WPL)) for potential disappointment.

Strategists at Goldman Sachs remain of the view consensus expectations are still too high and thus estimates will be cut throughout the season, they predict.

Goldman Sachs warns about a potential spike in impairments, plus debt covenants and dividends might come under pressure in selected cases. Plus some stocks on high PEs are plagued by negative momentum entering the reporting season, opening doors to capital punishment in case expectations won't be met.

Goldman Sachs has selected a few stocks for which sentiment remains poor but the analysts see potential for a positive surprise; Fairfax Media ((FXJ)), JB Hi-Fi, Downer EDI, Cabcharge, Flight Centre ((FLT)) and Ansell ((ANN)).

Citi strategists, in their latest strategy update, highlighted that while challenges and threats are plenty and real, there is still a reasonable chance total investment returns will still be "decent" over the medium term ahead.

Finally, UBS strategists reminded us all on Friday, big share price movements accompanied by changes in analysts' forward estimates give a reliable clue as to whether a given company remains poised for outperformance or underperformance post the release of its financial report, but only if both share price movement and changes to estimates occur.

Thanks for the tip, UBS. Read: thou shalt subscribe to FNArena and religiously watch consensus forecasts. As I do myself.

In terms of specific sector reports, below is a brief summary of what has been released up until the final day of July:

A-REITs

Believe it or not, but A-REITs (Real Estate Investment Trusts) have outperformed the broader market thus far this year and analysts at UBS believe this strong performance can last for much longer, describing the overall context as "conditions sympathetic to REIT outperformance".

In support of their view, the analysts note the following:

– this is and remains a low growth environment
– earnings outlook for the sector looks favourable compared with the market
– equity capital raised by the sector remains below historical averages
– sector now carries rock solid balance sheets
– very strong transactional evidence (supporting valuations)

Regarding profit growth, UBS is projecting 5%+ growth per annum on average until FY18. The likes of BHP and RIO would give their left arm if only they could switch sector now!

UBS analysts anticipate a positive surprise from Mirvac ((MGR)) which suits their preference for residential and regional retail. However, not everyone agrees with them – see also "Property" further below.

BANKS

This reporting season will be less about profits when it comes to Australian banks, but more so about the need to raise extra capital and how each individual bank responds to it, argue analysts at Citi. Few would disagree with this view.

CommBank will go first off the rank and the market would very much like to find out how Australia's largest bank is going to raise $4bn in the year ahead. A combination of asset sales on top of a dividend reinvestment program (DRP) seems but a logical scenario. There are doubts about the future outlook for Bendigo and Adelaide ((BEN)) dividends.

Analysts at Morgan Stanley already suggested earlier CommBank might surprise with a capital raising (to put the issue of capital to bed) and they also believe ANZ Bank ((ANZ)) might well do the same at the upcoming Q3 trading update.

Morgan Stanley believes investors will be focused on margins (expected to show slight decline), top line growth and expenses.

BUILDING MATERIALS AND STEEL

This is one sector poised to deliver above consensus profit results this reporting season, predict analysts at Morgan Stanley. Obviously, this offers potential for short to medium term outperformance.

As far as individual assessments are concerned, the analysts suspect BlueScope Steel's ((BSL)) guidance for first half FY16 may still be weak, while currency tailwinds have emerged for Fletcher Building ((FBU)), but Adelaide Brighton ((ABC)) has the potential to surprise to the upside and announce a special dividend. The analysts note, however, the threat of import competition won't go away, not even with a falling AUD.

DIVERSIFIED FINANCIALS

Credit Suisse sees potential for positive surprise from IOOF ((IFL)) and from Computershare ((CPU)) while potential disappointments could come from Henderson Group ((HGG)) (not so, reported a strong result last week) and from Platinum Asset Management ((PTM)). The analysts consider higher-than-expected costs a potential problem for both asset managers.

EMERGING COMPANIES

Already three weeks ago, UBS published its in-house findings and predictions for emerging companies in the Australian market. The investment banker's favourites are Aconex ((ACX)), GUD Holdings, Mantra Group and Servcorp ((SRV)).

Companies likely to surprise positively this season, on UBS' assessment, include Ardent Leisure ((AAD)), Automotive Holdings ((AHG)), GUD Holdings (has been confirmed by now), Mantra Group, Premier Investments ((PMV)) and Servcorp while companies likely to issue better-than-anticipated guidance include a2 Milk ((ATM)), Ardent Leisure, Aconex, Breville Group ((BRG)), Cabcharge, GUD Holdings (posted a strong result last week), Mantra Group, Premier Investments, Servcorp, TFS Corp ((TFC)) and TOX Solutions ((TOX)).

On the negative side, UBS sees downside risk for Breville Group ((BRG)), Cardno ((CDD)), GWA Holdings ((GWA)), Intueri Education Group ((IQE)), MMA Offshore ((MRM)), NRW Holdings ((NWH)), Skilled Group ((SKE)) plus The Reject Shop ((TRS)), with potential for worse-than-expected outlooks from companies including Bradken ((BKN)), Cardno, Flexigroup ((FXL)), Intueri Education Group, MMA Offshore, NRW Holdings, Pacific Brands ((PBG)), Skilled Group and The Reject Shop.

GAMING

JP Morgan analysts anticipate a strong result from Echo Entertainment and they are far from the only ones. Crown Resorts' ((CWN)) results will be scrutinised for cost cutting, suggest the analysts, while Tabcorp ((TAH)) looks poised to deliver solid growth. Investors will be curious to hear about the relaunch of Ubet by Tatts ((TTS)) while Ainsworth Gaming ((AGI)) has already guided for this year.

JP Morgan points out Ainsworth will give an investor presentation at the Australian Gaming Expo on August 11. Aristocrat Leisure ((ALL)) runs a fiscal year to September and won't report in August.

HEALTHCARE

Morgan Stanley analysts have genuine doubts about the FY16 outlook for the Superstars in the sector, CSL, Cochlear and Ramsay Healthcare. This is why the analysts believe the "value" propositions in this sector (read: cheaper stocks) are poised for outperformance this reporting season.

Peers at stockbroker Morgans counter this view by reiterating the healthcare sector looks like an oasis amidst the wreckages that are energy, mining and their related industrial derivatives. Morgans thinks investors will continue to like healthcare stocks because of their reilability in delivering solid growth. Analysts at JP Morgan agree, adding investors also like the sector because of its USD leverage (even if some of it is being diluted through a weaker euro).

For CSL doubt remains about topline growth, which Morgan Stanley believes is necessary to make the market believe in yet another strong performance in FY16. For Cochlear FY15 simply will be a hard act to follow, comment the analysts, while tariff cuts in France might temper guidance from Ramsay Healthcare for the year ahead.

Ansell is battling currency headwinds and might not be able to offset. Healthscope might surprise negatively in terms of required capex, but Sonic Healthcare ((SHL)) and Primary ((PRY)) should forecast strong growth ahead (despite recent profit warnings). In-vitro fertilisation stocks are currently trading on no-growth scenarios, thus that leaves room for surprise and the market is now better understanding of the regulatory issues plaguing Sigma ((SIP)) and Australian Pharmaceuticals ((API)), argue the analysts.

UBS is more sanguine about the sector overall, suggesting most healthcare companies will meet expectations this month, so investors will make choices and preferences on the basis of guidances and outlooks. Divergences in analysts' expectations are caused by FX variances, suggest the analysts, which is yet another indication that FX might play a prominent role this season.

UBS' sector favourites are CSL, Estia Health ((EHE)) and ResMed while the analysts see Cochlear potentially disappointing. JP Morgan on the other hand doesn't like Ansell, but very much Cochlear, CSL and Ramsay Healthcare (plus ResMed too).

INSURERS

The cycle has turned for domestic insurers though this hasn't stopped the sector from again functioning as a safer go to haven during times of general turmoil, observe analysts at Credit Suisse. With the sector staying mum on Gross Written Premia and on underlying margins, CS analysts believe the odds for disappointment are shorter this season.

CS anticipates a strong result from turnaround story AMP ((AMP)) but is cautious on Suncorp ((SUN)) (posted a reasonable result this week, although special dividend disappointed) and Insurance Australia Group ((IAG)). The onus is on QBE Insurance to show the bad days are now well and truly behind it, but CS continues to carry reasonable doubt, expecting a messy result. Suncorp is the sector favourite because of the anticipated pay-out of a 20c special dividend. CS also likes Steadfast ((SDF)).

Least liked are the two health insurers; Nib Holdings ((NHF)) and Medibank Private ((MPL)).

MEDIA

With traditional media companies facing ongoing pressure, new management at highly geared companies APN News & Media ((APN)) and Southern Cross Broadcasting ((SXL)) plus with some of the online media such as Seek ((SEK)) and REA Group ((REA)) facing increasing competition, the media sector has plenty to offer to keep investors' attention this reporting season, suggest analysts at JP Morgan.

They believe further cost cutting will feature prominently, in particular for companies including Fairfax Media and News Corp ((NWS)), but also capital management initiatives are likely from Nine Entertainment ((NEC)) and from Fairfax.

Overall, JP Morgan analysts believe this sector continues to be at risk for further downgrades to consensus forecasts.

PACKAGING

Investors have rediscovered the relative defensive nature (through solid and consistent growth) and the cash flow generative capabilities of the packaging sector ahead of the August reporting season, observes Macquarie. The analysts don't think investors will be disappointed this month.

Both Orora ((ORA)) and Amcor should benefit from a weaker Aussie dollar. Interest in Pact Group ((PGH)) has been reignited post the Jalco acquisition.

PROPERTY

Read between the lines and Morgan Stanley believes this could well become one of the top performing sectors this reporting season. Not only are guidances expected to be met, the analysts also believe conditions for offices and retail have improved and this will be reflected in outlook statements.

There is some caution in that investors scrutiny will be extra-intensive for the residential exposures Mirvac and Stockland ((SGP)), the analysts suggest, with expectations high and investors likely to question their rationale for owning these stocks if disappointment might eventuate. Morgan Stanley sits below consensus for both stocks.

All in all, the analysts favour Goodman Group ((GMG)), Lend Lease, National Storage ((NSR)) and Arena REIT ((ARF)), least liked are Charter Hall ((CHC)), Stockland and Mirvac.

RETAIL

Consumer sentiment has remained largely weak, but housing related activity is strong and consumer electronics has held up pretty well. Deutsche Bank analysts anticipate retailers should do reasonably well this season with Harvey Norman, Dick Smith ((DSH)) and Wesfarmers ((WES)) the sector favourites. The analysts note expectations are high for Harvey Norman, but they think it won't be a problem.

Analysts at Morgan Stanley note smaller retailers were at the forefront for issuing profit warnings in the lead-in to the February reporting season. With August upon us, the sector has remained remarkably silent. This is taken as a good sign.

All in all, Morgan Stanley still expects lack of conviction and optimism to colour the smaller retailers' performances this season, so investors are advised to look out for retailers with specific growth engines.  The analysts tip Premier Investments to deliver a strong result, but remain ambiguous on the stock because of its valuation.

Their favourites in the sector are Burson ((BAP)), Lovisa ((LOV)) and SurfStitch ((SRF)).

TMT

Bell Potter is expecting a strong reporting season from TMT stocks (Technology, Media and Telecommunication), in particular from Altium ((ALU)), Integrated Research ((IRI)) and My Net Phone ((MNF)). Bell Potter's favourite stocks in the sector are Altium, Empired ((EPD)) and Appen ((APX)).

Analysts at Morgans have become concerned about the performance outlook for telecommunication stocks, observing the sector has outperformed the broader market seven years out of the past ten. How long can this outperformance continue? A cautious Morgans has downgraded the sector to Underweight ahead of the reporting season.

Morgans' sector favourites are NextDC ((NXT)), BigAir ((BGL)) and Superloop ((SLC)).

TRANSPORT

Transport continues doing it tough with retail sentiment lagging, but with spending exhibiting some growth and with resources suffering yet another correction. Deutsche Bank analysts retain the faith and suggest the environment will allow the hidden gems in the sector to rise and shine. In their view these gems are Asciano, Aurizon and Qantas.

The analysts observe most companies in the sector have been cutting costs for a while now and investors' attention will be drawn to margins and cash flows with the latter offering opportunity through capital management.

Analysts at JP Morgan suggest Brambles is facing FX headwinds plus the US pellet operations are battling with higher costs and contract losses. If everything goes well, Qantas could become a candidate for future capital management.

To be followed-up, updated and reviewed throughout the month ahead.

P.S. I am at the Australian Investors' Association (AIA) National Conference on the Gold Coast. Come and say Hi if you happen to be around. My presentation is on Tuesday morning, 10.30am.

P.P.S. FNArena will continue its tradition for keeping records and updates on how reporting companies are performing vis-a-vis analyst expectations throughout August. Our first reports/updates start later this week.

Rudi On TV

– on Thursday, Sky Business, noon-12.45pm, Lunch Money

Rudi On Tour

I am presenting on Tuesday morning 10.30am at the :

– AIA National Conference, Surfers Paradise Marriott Resort and Spa, Queensland

(This story was written on Monday, 03 August 2015. It was published on the day in the form of an email to paying subscribers at FNArena).

(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.

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 Editor Direct on the website).

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THE AUD AND THE AUSTRALIAN SHARE MARKET

This eBooklet published in July 2013 forms part of FNArena's bonus package for a paid subscription (excluding one month subscriptions).

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

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MAKE RISK YOUR FRIEND – ALL-WEATHER PERFORMERS

Odd as it may seem, but today's share market is NOT only about dividend yield. Post-2008, less risky, reliable performers among industrials have significantly outperformed and my market research over the past six years has been focused on identifying which stocks, and why, are part of the chosen few; the All-Weather Performers.

The original eBooklet was released in early 2013, followed by a more recent general update in December 2014.

Making Risk Your Friend. Finding All-Weather Performers, in both eBooklet versions, is included in FNArena's free bonus package for a paid subscription (excluding one month subscription).

If you haven't received your copy as yet, send an email to info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of July available. Just send an email to the address above if you are interested.

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