Rudi's View | Mar 15 2018
In this week's Weekly Insights (this is part two):
-Have You Been Paying Attention?
-More Snippets Post Feb Reporting Season
-Harvester Pain (Lots Of It)
[Note the non-highlighted items appeared in part one on the website on Wednesday]
More Snippets Post Feb Reporting Season
By Rudi Filapek-Vandyck, Editor
Against a background of firm global economic momentum, epitomised by headlines such as "Strongest growth predicted since global financial crisis" (AFR), the February reporting season in Australia did not disappoint. Contrary to previous years when every season generated at least a few shock updates from household names such as BHP, Woolworths and Telstra, overall sentiment leaned towards the positive side and there were no real shockers delivered unless by companies we already knew were facing tougher times.
I very much doubt whether anyone was genuinely surprised to hear about yet another corpse discovery inside QBE Insurance ((QBE)), or that Harvey Norman's ((HVN)) franchisees needed a lot extra support from head office.
There are always companies that miss the mark, of course, and faster growing mid-cap industrials undoubtedly stole the show in February, but the big end of town equally stood its ground, in many cases forcing stockbroking analysts to upwardly revise forecasts and valuations.
The overview table below (thanks Citi) shows growth expectations for the ASX200 ("the market") and for main sectors prior to the February season and after; it clearly shows expectations have pretty much risen across the board, and for both FY18 and FY19.
This has been an observation highlighted by many an analyst post February, including Martin Currie Australia Chief Investment Officer (CIO) Reece Birtles, who has noted a higher degree of growth prospects suggested by many company CEOs during the season. Another shift from past seasons is that sales growth, rather than cost cutting, has now become the major driver behind this renewed growth optimism.
Other significant developments to emerge from the February reporting season, according to Birtles:
-Best reporting season for EPS revisions since the Global Financial Crisis bounce-back, with 22% more upgrades than downgrades;
-Higher capex didn’t put a dent in dividend payments which remained steady;
-Delivered EPS and forward expectations both rose, with the latter showing the strongest lift in five years;
-Positive revisions appear a bit under-baked given the strong sales data, with most of the uplift coming from the fact that actuals came in ahead of the forecasts;
-Given the market sell-off during February, and the ongoing macro uncertainty, analysts have not been as bullish when revising their models for future earnings growth, this suggests further upgrades going forward.
Analysts at Deutsche Bank who cover emerging companies selected the following five Top Picks: 3P Learning ((3PL)), Ausdrill ((ASL)), Cardno ((CDD)), Cleanaway Waste Management ((CWY)), and Seven Group Holdings ((SVW)).
Macquarie analysts delved deeper into results updates by consumer stocks; a sector that generated quite a number of memorable "misses" throughout the season, but certainly also some fabulous "beats".
Earnings throughout the sector are slowing in general terms, the analysts acknowledge, with Retail showing up as weaker than staples with downgrades for Harvey Norman, Automotive Holdings ((AHG)), Greencross ((GXL)) and Myer ((MYR)) weighing heavily. However, Macquarie analysts also believe now that share prices are weaker, investors are being compensated for related risks.
While retail sales data have remained weak, Macquarie maintains overall consumption data have been OK, supported by the observation that consumers are still attracted to high quality physical offers.
Analysts at UBS identified three key themes for the consumer sector: consumer spending is softening, cost pressures are rising, and companies are busy preparing for the Amazon challenge. Post the February season, UBS analysts have turned less positive on the sector.
UBS analysts see post-February opportunities in Flight Centre, Costa Group ((CGC)) and Treasury Wine Estates ((TWE)). Their Key Picks for the sector are Flight Centre, Woolworths and Costa Group, in a positive sense, and Myer and Coca-Cola Amatil in a negative sense.
Macquarie also found the February reporting season for engineers and contractors turned into something of a mixed bag, as most companies delivered higher revenues but also weaker margins. Margins are expected to slightly rise, mainly because that's how the cycle for this sector unfolds, but the key challenge remains to keep costs tamed, say the analysts.
The analysts are buyers on weakness, maintaining a positive sector outlook with the caveat that additional contract wins are necessary to justify today's share prices, even after recent weakness. The analysts see potential near term contract wins for Monadelphous ((MND)) and Cimic Group ((CIM)), but the best value proposition is considered to be Downer EDI ((DOW)).
Elsewhere, Macquarie analysts seem delighted the infrastructure theme is playing according to script, becoming more and more important for the building sector in Australia. Stand-out sector results, in the analysts' opinion, have been delivered by James Hardie ((JHX)) and Reliance Worldwide ((RWC)), with nothing much to dislike.
Apart from James Hardie and Reliance Worldwide, Macquarie also nominates Boral ((BLD)) as preferred sector exposure, even as Boral's update disappointed. The analysts suggest the issues behind that disappointment are improving.
Deutsche Bank analysts have concluded the outlook improved for paper and packaging companies, despite Amcor ((AMC)) facing selling pressure post what the analysts believe was a report slightly better than expected. All three of Amcor, Orora ((ORA)) and Pact Group ((PGH)) are poised for underlying earnings growth, argue the analysts.
Amcor and Pact Group are most preferred.
Citi's High Conviction Calls list currently consists of ten stocks, of which one carries a negative (short) view. That one is electronics retailer JB Hi-Fi ((JBH)).
The nine stocks with a positive Conviction nomination are Aristocrat Leisure ((ALL)), ALS ltd ((ALQ)), BlueScope Steel ((BSL)), Computershare ((CPU)), Downer EDI ((DOW)), Incitec Pivot ((IPL)), Galaxy Resources ((GXY)), Star Entertainment ((SGR)), and NZ-based cloud accountancy software provider Xero ((XRO)).
Elsewhere, Citi analysts covering diversified financials in Australia are nominating Link Administration ((LNK)) as their Top Pick, very much liking the company's earnings growth trajectory with potential upside risk to both Superpartners and LAS synergy targets.
They must have been quite disappointed, to put it mildly, at stockbroker Morgans where the Income Model Portfolio had been accumulating shares in IPH ltd ((IPH)) only to find the February reporting season simply delivered yet another disappointment, and subsequent share price shellacking. Admittedly, the shares are now trading well below where most broker targets reside, but then again, how many more disappointments can one company, not even with a long history as a publicly listed entity, generate?
The official line at Morgans is that the stock looks too cheap, albeit with the observation that management's credibility is now "a material issue". The holding is now officially "under review". At the last portfolio update IPH ltd accounted for 2.4% of total holdings, with 3.7% sitting in cash.
The broker's Balanced Model Portfolio also suffered from owning IPH ltd, but luckily Corporate Travel Management ((CTD)) had an excellent February. This portfolio has been selling Challenger ((CGF)) after two years of stellar returns. It appears the decision to sell has been taken because of a changing risk profile. Morgans motivates the decision as follows:
"Transparency on CGF's investment book, particularly its bond holdings, is limited and we're cognisant that the rising interest rate environment does have the potential to trigger disorderly re-balancing in these markets."
The Growth Model Portfolio significantly outperformed in February, and also has been selling its shares in Challenger. The portfolio has topped up its holding in Motorcycle Holdings ((MTO)), as well as in Macquarie Atlas Roads ((MQA)). Portfolio exposure to Megaport ((MP1)) has been slightly reduced, while CYBG ((CYB)) has been exited in full.
Morgans also grabbed the opportunity to publish its selected list of High Conviction Calls amidst numerous reviews and assessments of the February reporting season. The list consists of only seven names: ResMed ((RMD)), Link Administration, BHP ((BHP)), Westpac ((WBC)) and Oil Search ((OSH)) among the large caps, and PWR Holdings ((PWR)) and Senex Energy ((SXY)) outside of the top 100.
EML Payments ((EML)) was one of the smaller cap industrials whose financial update missed the mark in February and investors did not wait around, with the stock listed as one of the big losers for the month. EML has been removed from the Conviction List at Wilsons, described as a "prudent" move. In its place came the addition of Melbourne IT ((MLB)) which did surprise in a positive sense in February.
Other stocks that remain on Wilsons Conviction List: Afterpay Touch ((APT)), Bravura Solutions ((BVS)), Ruralco ((RHL)), Collins Foods ((CKF)), Ridley Corp ((RIC)), ImpediMed ((IPD)), Nanosonics ((NAN)), Citadel Group ((CGL)), Opthea ((OPT)), and Pinnacle Investment ((PNI)).
Emerging companies analysts at UBS also lined up their Key Picks & Sells once all February reported had been digested. Key Buys are Adairs ((ADH)), Appen ((APX)), Bapcor ((BAP)), Bega Cheese ((BGA)), Bingo Industries ((BIN)), Cleanaway Waste Management ((CWY)), EclipX Group ((ECX)), Premier Investments ((PMV)), The Reject Shop ((TRS)), NextDC ((NXT)) and Webjet ((WEB)).
Earlier in the week's audio interview on changed dynamics for the Australian share market:
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
-Friday, 11am Skype-link to discuss broker calls
Rudi On Tour
-An Evening With Rudi, Paddington, 11 April
-Presentations to ASA members and guests Gold Coast and Brisbane (2x), on 12 & 13 June
-ATAA members presentation Newcastle, 15 July
-AIA National Conference, Gold Coast QLD, late June-August 1
-Presentation to ASA members and guests Wollongong, in September
(This story was written on Monday 12th March and the second part on Wednesday 14th March. This first part 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. This is Part two).
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