Rudi's View | Sep 06 2017
In this week's Weekly Insights (published in two separate parts):
–August Reporting Season: Costs & Capex, Mining & Dividends
-Conviction Calls: Citi, CLSA and Goldman Sachs
–Rudi In The Australian
-CBA And The Premium Gone (Volume 2)
–Buy Signal For Equities
-Rudi On BoardRoomRadio
-2016 – L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour
[Note the non-highlighted items appear in part two on the website on Thursday]
August Reporting Season: Costs & Capex, Mining & Dividends
By Rudi Filapek-Vandyck, Editor FNArena
Reporting season is always a subjective experience. Most investors observe it through the prism of their own portfolio. Post August 2017 this means most feel like they witnessed a rather underwhelming performance with numerous disappointments stemming from dividend paying non-resources companies including Telstra ((TLS)), Wesfarmers ((WES)) and the insurers, while many cheap looking stocks became a lot cheaper through the season.
Not helping matters was the eruption of a fresh scandal at Australia's largest index constituent, CommBank ((CBA)), which dragged down the whole sector, widely owned CBA shares in particular.
In the end, what transpired was a reporting season that wasn't as bad as it looked like after the first two weeks. Many disappointments were delivered by large cap, household names, including Suncorp ((SUN)), Insurance Australia Group ((IAG)), CSL ((CSL)), Ramsay Health Care ((RHC)), Adelaide Brighton ((ABC)), Harvey Norman ((HVN)), James Hardie ((JHX)), ResMed ((RMD)), Challenger ((CGF)) and Magellan Financial ((MFG)) – this weighed on investor sentiment generally.
The disappointment of the season carries the signature of Telstra, with the subsequent sell-off causing even more pain for suffering shareholders.
Telstra shares were certainly not the only one that looked "cheap" prior to August, and then became a lot "cheap-er"; Mayne Pharma ((MYX)), Healthscope ((HSO)), iSentia ((ISD)), Vocus Communications ((VOC)), Sky Network TV ((SKT)), Japara Healthcare ((JHC)), Australian Pharma ((API)), CSG Ltd ((CSV)), The Reject Shop ((TRS)),.. the list is extensive with sharp share price movements to the downside popping up on a daily basis.
In the end, share price outperformance came from AREITs, resources (both miners and energy) and from high PE growth stocks that didn't disappoint, such as Carsales.com ((CAR)), Orora ((ORA)) and Treasury Wine Estates ((TWE)).
Expectations were high, and execution was far from flawless. Even those large bulk miners, swimming in cash and determined to pamper long suffering shareholders, couldn't quite meet analysts' expectations. But investors liked the share buybacks, the extra dividends, the asset sales and the promise of financial discipline.
Strip away the buoyant mining sector, however, and we see a corporate Australia in distress. Rising costs are a genuine problem, not because of wage pressures, but due to higher electricity bills and a much stronger than projected Aussie dollar. Competition and disruption are also key determinants.
These are the reasons corporate Australia is returning focus towards investments and capital expenditure again; which may be good news for GDP numbers and political grandstanding, but in the share market much of the spending done is defensive in nature (i.e. to stay competitive and relevant) and thus not necessarily good news for shareholders. Think Telstra, Seek ((SEK)), GBST ((GBT)), and Suncorp.
This is why guidances for the year ahead proved rather underwhelming, and why analysts have been busy cutting their forecasts.
The largest victims have been dividend investors and bargain hunters. On average, dividend payments have held up well this past season, but this masks the fact that resources companies stepped it up, including many a gold producer. In the background, a number of the trusted dividend paying names announced cuts, including Telstra, G8 Education ((GEM)), Insurance Australia Group, Harvey Norman, and others.
All in all, dividend payouts are clearly under pressure from traditionally trustworthy dividend paying sectors telecom, energy and healthcare.
Separating the diamonds from the dogs is not always straightforward, and share price responses are not always a reliable indicator, but near universal recognition has shown up for strong, high quality "beats" delivered by Bendigo and Adelaide Bank ((BEN)), Cimic Group ((CIM)), Fortescue Metals ((FMG)), IOOF Holdings ((IFL)), Janus Henderson ((JHG)), Orora, Carsales.com and Sydney Airport ((SYD)).
Stand-out performances among smaller cap stocks include Altium ((ALU)), Lovisa ((LOV)), WiseTech Global ((WTC)), Reliance Worldwide ((RWC)), oOh!media ((OML)), Smartgroup Corp ((SIQ)) and SG Fleet ((SGF)). The energy sector, under continued pressure from a lower-than-projected oil price, put in a better-than-expected performance, with cost control a major factor. Not surprisingly, the sector put in a positive performance in a month when dividends contributed 0.8% of the total 0.71% return for the ASX200.
Universally acclaimed shockers and unsettling disappointments came from BlueScope Steel ((BSL)), Crown ((CWN)), Challenger, Domino's Pizza ((DMP)), Healthscope, Insurance Australia Group, James Hardie, and, of course, Telstra.
Each reporting season contains two important factors that should have investors' attention:
-How do companies perform and what is their outlook?
-How does the financial performance and outlook impact on analysts' ratings, valuations and forecasts?
The first item wasn't that bad given FY17 growth achieved was the best on record for a long time. Depending on what methodology used, average profit growth was either circa +17% or +25% and either number is well above average. They are both well above the tepid numbers recorded in each of the four reporting seasons post 2014 and prior to February this year.
But actual performances proved below expectations in many cases; as such they triggered reductions in analysts' forecasts. The fact many guidances (in those cases where companies actually provided one) proved rather uninspiring further weighs on estimates for FY18 and FY19. Low to mid single percentage growth seems to be the new normal, though upside exists from higher-for-longer commodity prices, in case there's no weakness on the horizon.
Outside the resources space, however, the bias seems to the downside. And growth projections already are low.
In terms of the actual numbers generated, after keeping track of 319 companies that reported in August, FNArena stats show "beats" and "misses" were relatively equal, percentage wise, this season at circa 27%. This puts the percentage in "misses" equal to last reporting season in February, but these numbers remain high by historical standards; 27% is the highest number recorded since August 2013 when FNArena first started tracking in-season corporate performances.
On the other hand, 27% in "beats" is low when February last had 35% and prior seasons never fell below 30% with one exception; August 2013 which generated the lowest percentages on record for both beats and misses at 25% and 19% respectively.
So the general perception is correct in that more companies failed to impress while less companies managed to muster a positive surprise. The average increase in price target, at circa 1.80% is higher than the 1.36% generated in February, but below 2% is nothing to get overly excited about.
A really good season is when the average target increases by 5%. Though such number certainly seems out of reach in the current low growth environment with many financials and industrials struggling to withstand pressure on margins.
A special mention goes out to All-Weather Stocks and High PE growth stocks; many of which equally failed to shoot the lights out this season, likely indicating the pressure on profit margin this time around is pretty universal, and difficult to escape from.
But while failures and subsequent sell-offs for a stock like Domino's Pizza receive a lot of attention, and I-told-you-so knee-jerk responses from sideline commentators, a number of structural growth stories certainly were more than just validated this season, including by a2 Milk ((A2M)), Corporate Travel ((CTD)), Treasury Wine, WiseTech Global, Altium, ARB Corp ((ARB)), Bapcor ((BAP)), Cochlear ((COH)), Costa Group ((CGC)), InvoCare ((IVC)), NextDC ((NXT)), Orora and Webjet ((WEB)).
Instead of trying to figure out whether perennial disappointers such as Healthscope, iSentia, The Reject Shop or Vocus Communications have finally sunken deep enough to represent "good value", investors might be doing themselves a far better favour by trying to use any share price weakness to on board of a proven growth trajectory that has much further to run.
Amongst the lesser known names, a number of smaller sized companies are creating a positive legacy full of future promise, including Apollo Tourism & Leisure ((ATL)), Australian Finance Group ((AFG)), Autosports Group ((ASG)), Blue Sky Alternative Investments ((BLA)), Class ((CL1)), Hub24 ((HUB)), MNF Group ((MNF)), PWR Holdings ((PWR)) and Service Stream ((SSM)).
Rudi In The Australian
For those who wish to read my story on All-Weather Performers in The Weekend Australian, August 19-20, the following link downloads the story in PDF:
Rudi On BoardRoomRadio
Last week's audio interview:
2016 – L'Année Extraordinaire
It was quite the exceptional year, 2016, and I did grab the opportunity to write down my observations and offer investors today the opportunity to look back, relive the moments and draw some hard conclusions about investing in the world today.
If you are a paid subscriber to FNArena, and you still haven't downloaded your copy, all you have to do is visit the website, look up "Special Reports" and download your very own copy of "Who's Afraid Of The Big Bad Bear. Chronicles of 2016, A Veritable Year Extraordinaire" (in PDF).
For all others who still haven't been convinced, eBook copies are for sale on Amazon and many other online channels. You'll have to visit a foreign Amazon website to also find the print book version.
All-Weather Model Portfolio
In partnership with Queensland based Vested Equities, FNArena manages an All-Weather Model Portfolio based upon my post-GFC research. The idea is to offer diversification away from banks and resources stocks which are so dominant in Australia, while also providing ongoing real time evidence into the validity of my research into All-Weather Performers.
This All-Weather Model Portfolio is available through Self-Managed Accounts (SMAs) on the Praemium platform. For more info: email@example.com
Rudi On TV
This week my appearances on the Sky Business channel are scheduled as follows:
-Tuesday, 11.15am Skype-link to discuss broker calls
Rudi On Tour
– I will be presenting in Adelaide on November 14th to members of Australian Investors Association and other investors, 7pm inside the Fullarton Community Centre, 411 Fullarton Rd, Fullarton. Title of presentation: Investing In A Slow Growing World – An Update
(This story was written on Monday 4th September, 2017. It was published on the day in the form of an email to paying subscribers at FNArena. This is part one. The second part will be published on the website as a separate story on Thursday).
(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: firstname.lastname@example.org or via the direct messaging system on the website).
BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS
Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:
– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.
Subscriptions cost $380 for twelve months or $210 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup