August Results Thus Far: Less ‘Misses’ Are A Positive

This story features RAMSAY HEALTH CARE LIMITED, and other companies. For more info SHARE ANALYSIS: RHC

In this week's Weekly Insights:

-August Results Thus Far: Less 'Misses' Are A Positive
-Rudi On TV
-Rudi On Tour

August Results Thus Far: Less 'Misses' Are A Positive

By Rudi Filapek-Vandyck, Editor FNArena

In an ideal world, the Australian share market would be isolated from global macro-economic and geopolitical dynamics, so that share price movements in August can be more reflective of corporate results and how they compare to share price valuations and market forecasts.

In the real world, of course, no such separation can be established. And besides, this year the slew of exogenous influences includes political shenanigans in Canberra, from which it remains impossible to separate either way (though many among us would take that option, no doubt about that).

And so it was that after three busy weeks of assessing and weighing up in excess of 230 corporate results, the ASX200 Accumulation Index has gained the grand total of 0.09% for the month. Luckily, July had been a positive month. The Jackson Hole speech by Fed chair Jerome Powell percieved as "dovish" might assist the local market in adding some additional upward momentum into the final week of the month.

It is not possible to estimate where the index would be without Coalition government infighting, but what we can establish is that the overall picture for the running reporting season made a leap for the better in its third week. On current numbers, more than 30% of released results did better than expected while less than 23% disappointed either on financial performance, or on forward guidance, or both.

In particular that latter percentage means this could become one of the better reporting seasons simply as a result of less corporate disappointments. As a comparison: in February we measured 37% of all results as better-than-expected -the equal highest in the five year history of FNArena's Corporate Results Monitor- with 25% below expectations.

The lowest number of disappointments in a  reporting season was established in the very first season we covered: 19% in August 2013.

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We probably still have circa 80 results to add to the current tally, but in terms of market capitalisation reported company results by now represent some 95% of the Australian share market. Only Ramsay Health Care ((RHC)), Boral ((BLD)) and Caltex Australia ((CYX)) have yet to report among the larger cap household names, to which I no longer include a bricks and mortar retailer such as Harvey Norman ((HVN)).

Among the negatives that are unlikely to change in the week ahead: earnings forecasts are under pressure, in a broad sense, with estimates for FY19 suffering the largest pullback since the start of the calendar year. The good news is, this month's pullback in forecasts remains a lot smaller than the reductions that were occurring prior to and during last year's August reporting season.

We are talking less than -1% versus in excess of -1% in August last year and -3%+ in both February 2016 and August 2015.

With only Macquarie Group yet to report among ASX20 constituents (Macquarie reports out-of-season), it once again has become evident most of the seasonal excitement lives outside the so-called Blue Chip stocks in Australia. With exception of Wesfarmers ((WES)) and of CSL ((CSL)), most of the positives from the local Top20 tends to arrive in the form of "not as bad as feared" or "could have been a lot worse".

Think QBE Insurance ((QBE)), and Telstra ((TLS)), and Suncorp ((SUN)).

Another method to deliver positively is by announcing restructuring, cutting costs, and spinning off non-core operations. That's what Brambles ((BXB)) did. Amcor ((AMC)) announced a large acquisition in the US.

Yet again the Top20 proved not to be the safe haven investors once upon a time might have perceived it to be with Origin Energy ((ORG)) and Insurance Australia Group ((IAG)) widely mentioned as among the weaker stand-outs for the present reporting season. Both share prices have fallen noticeably, which is hardly a coincidence.

CommBank ((CBA)) reported its weakest financial performance since the GFC, and that was before Westpac's ((WBC)) quarterly trading update shocked with a noticeably lower Net Interest Margin (NIM). Rio Tinto's ((RIO)) share price equally went down by double digit percentage following a disappointing interim result, but here the falls were exaggerated on the back of a general pullback in commodities prices and stocks.

Rising costs are back as the bogeyman for Australian corporate managers and Rio Tinto's early signalling has since been swiftly followed up by the likes of Adelaide Brighton ((ABC)), Ale Property Group ((LEP)), Ansell ((ANN)), Huon Aquaculture ((HUO)), Northern Star ((NSR)), Pact Group ((PGH)) and St Barbara ((SBM)), among many others.

A number of company boards tried to placate otherwise disgruntled shareholders with additional dividends and other forms of capital management. Indeed, many surprises this month again arrived in the form of higher-than-forecast dividends, which should at the same time trigger questions from investors. What are companies trying to hide?

Perpetual fund manager Anthony Aboud has already gone on record in warning investors on his observation companies are increasingly using trickery and aggressive accounting to make sure they meet market expectations. A relatively low number of "misses" for the season thus far can be seen as potentially supporting Aboud's under-the-bonnet analysis. Domino's Pizza ((DMP)) is among companies being accused by some of obfuscating the true picture inside the fast food empire, while FY17 numbers were restated at Corporate Travel ((CTD)) for reasons not clear to everyone.

On Monday, analysts at CLSA downgraded MYOB ((MYO)) to Sell with a price target of $3.12 for similar reasons. CLSA suggests the quality of the financial results reported looks "suspect", with the company being accused of having under-invested for too long, and with management still reluctant to admit it will have to spend a lot more in the years ahead, or else lose the war with heavy spending rival Xero ((XRO)).

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Tim Baker and David Jennings, equity market strategists at Deutsche Bank, summed the present reporting season up as follows:

1. Earnings results are largely in-line, which is seen as broadly positive. One niggling negative here is that Deutsche Bank up until Friday had upgraded FY19 earnings estimates for only 37% of companies, well below the historic average of 45%.

2. Dividend payout ratios have once again surprised (better than expectations).

3. Industrials companies have reported higher-than-forecast margins. One niggling negative here is very few surprised with their top line growth, suggesting to Baker and Jennings low quality items have made up the difference.

4. Earnings growth on average remains "decent". On Deutsche Bank's numbers, growth for the six months to June 30 is about 7%.

5. Industrials companies are still seeing solid growth, in particular offshore earners and resources related companies.

6. High PE names are simply refusing to de-rate, even as some companies slightly disappointed, guided towards slower growth, or announced increased spending.

Market strategists at UBS highlighted slightly different angles, noting forward guidance, if and when provided, is where most of this month's disappointments showed up. At UBS, negative EPS earnings revisions for FY19 outnumber positive revisions by two-to-one.

Upside surprises came mostly in the form of better cash flows and higher dividends, with UBS pointing at resources stocks in particular.

Other points highlighted by UBS:

1. Market still not afraid to pay up for high PE stocks, and quite forgiving in case of "misses" by premium stocks

2. General insurers reported robust pricing increases

3. There are signs of a modest recovery in mining exploration

4. Mining services providers and contractors are benefiting from East Coast infrastructure spending

5. Lower electricity prices have triggered downgrades for generator retailers

6. Higher quality offshore earners are generally performing better than domestically oriented companies, particularly in the healthcare sector

On UBS's assessment, the most positive reports from large cap stocks in the first three weeks were released by Cimic Group ((CIM)), Magellan Financial ((MFG)), QBE Insurance, and a2 Milk ((A2M)). The most disappointing releases are believed to be those from Challenger ((CGF)), Iluka Resources ((ILU)), Ansell, and Insurance Australia Group.

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As per standard practice, each reporting season sees companies being punished for badly missing market forecasts. On Monday, as I write this Weekly Insights update, shares in telecom minnow Netcomm Wireless ((NTC)) are down in excess of -38% post the release of FY18 financials.

Elsewhere, childcare centres operator G8 Education ((GEM)) has continued the bad news cycle with a weaker than expected FY19 guidance and its shares are down -15%. On my observation, stocks like G8 Education tend to attract investor attention because of their high implied dividend yield which tends to give the wrong impression that downside potential is limited and thus buying the shares a low risk strategy.

Another example is Automotive Holdings ((AHG)) which, earlier in the year, saw its share price fall from $3.40 to below $3, after which the interest of many a yield seeking investor was piqued. This month's financial results could not prevent analysts from reducing forecasts further, and the result is now a share price of $2.34.

Investors might be enjoying better-than-expected dividends at the top end of the market, where companies meet and beat expectations, in the nasty corner, where cash is under pressure and management teams cannot instill a recovery quickly enough, there is always plenty of pain for investors hoodwinked by numbers from the past or simply because they don't want to own a previous error and decide hoping for the best is not such a bad strategy.

This is as good as anytime to once again highlight the fact that analysts forecasts remain subject to changes under the best of circumstances; they will change in case of better and worse developments, which then has a follow-on impact on valuations and thus the share price.

Following the recent rallies in telecom stocks, banks are now the highest yielding sector in the Australian share market, and quite by a margin. Average yield for banks stands at 6.3% versus 5.9% for Financials, 5.7% for telcos and 5.4% for utilities with AREITS currently offering on average 5.1%.

Next week: the final review of the August reporting season.

See also:

https://www.fnarena.com/index.php/2018/08/22/august-results-thus-far-quality-costs-and-dividends/ (last week)

https://www.fnarena.com/index.php/2018/08/08/august-reporting-season-preview-potential-beats-misses/ (week prior)

FNArena maintains a Corporate Results Monitor on its website, with daily updates: https://www.fnarena.com/index.php/reporting_season/

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday, 10.30am Skype-link to discuss broker calls
-Friday, 11am, Skype-link to discuss broker calls (unlikely, probably too busy, but possible)

Rudi On Tour

-Presentation to ASA members and guests Wollongong, on September 11
-Presentation to AIA members and guests Chatswood, on October 10
-Presentation to ATAA members and guests Sydney, on 18 October
-AIA Celebrity Lunch, Brisbane, on November 3

(This story was written on Monday 27th August 2018. It was published on the Monday in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website).

(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 the direct messaging system on the website).

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(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.) 

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