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Australian Equities Pre-August: Polarisation Remains The Word

Feature Stories | Jul 27 2018

Download related file: FNArena-Reporting-Season-Monitor-March-July-2018

The story below was first published on 24 July 2018 as Weekly Insights. It has now been re-published as a Feature Story.

By Rudi Filapek-Vandyck, Editor FNArena

Twice each year investor attention in Australia goes out to how well corporate profits are stacking up in comparison with share price valuations and market forecasts. However, not every ASX-listed company reports its financial numbers in February and August.

To my knowledge, FNArena is the only service around that consistently and meticulously keeps a close watch on corporate earnings reports in Australia. Earlier this year, we launched a dedicated section to the website:

Even though we counted 53 companies reporting in between February and the upcoming August results season, not much attention is usually given to what has happened in this corporate results sideshow. Admittedly, our coverage also includes banks and we know CommBank ((CBA)) reports in August, and stocks like ResMed ((RMD)) which, being US-listed, updates every three months.

But the bulk of companies reporting in let's call it the in-between season consists of smaller mining companies, retailers, infrastructure and mining services providers, agricultural companies, building materials and housing related companies, financial services providers and funds managers, plus a number of technology companies – quite the diversified bunch which, outside the banks, Macquarie Group ((MQG)), REA Group ((REA)), and Aristocrat Leisure ((ALL)) has little representation in the ASX50.

This week we closed off the in-between reporting season with the upside surprise delivered by Cimic ((CIM)) the final inclusion for this season. Before we zoom in on what August might deliver, are there any conclusions we can take on board from the 4.5 months past?

Conclusion number one has to be that significant parts of corporate Australia are doing it tough. Small cap analysts at Canaccord Genuity have counted more than 200 profit warnings have been delivered thus far in Australia since the beginning of calendar year 2018. Most of these warnings have remained outside the scope of most investors. Asaleo Care ((AHY)), despite many of its products being bought on a weekly basis by Australian households, never made it to common household name status in the share market, and the stock is no longer a member of the ASX200.

A similar observation can be made for smaller technology stocks such as Objective Corp ((OCL)), Hansen Technologies ((HSN)) and Integrated Research ((IRI)). And for agri-company Nufarm ((NUF)) who only a few months ago delivered a feeble result but with better-than-anticipated guidance. Since then a dire and extensive drought in rural parts of Australia has put a big dent into management's forecasts.

Hands up who had been anticipating a super result from Australian Pharmaceuticals ((API))? Myer ((MYR))? Village Roadshow ((VRL))? Even wealth manager Perpetual ((PPT)) never seemed primed for a result that would instantly turn around the stock's downward sloping trajectory.

In broad, general terms we can conclude the in-between results season largely confirmed what we already knew about the Australian economy and the transformation that is currently taking place. We have sectors under pressure, including bricks and mortar retailers, banks and financial services providers, plus telecom and, apparently, smaller technology service providers. Corporate results from companies in these sectors came out in-line at best, with the risks skewed towards a negative disappointment.

On the other hand, we have mining and infrastructure services providers and engineers, we have building materials stocks, miners and energy producers, and we have healthcare on the positive side and -lo and behold- companies operating in these industries have been prone to more likely deliver a positive surprise.

The one added observation that is worth mentioning is that a number of disappointing releases have stemmed from small cap mining companies, likely indicating that, no matter the overall environment shaped by commodity prices, there will always remain an above average risk attached to drilling and mining a small operation exposed to nature's brutality.

Equally noteworthy is the fact that share market darlings including Macquarie Group, Aristocrat Leisure, Fisher & Paykel Healthcare ((FPH)), Hub24 ((HUB)), Netwealth Group ((NWL)), Praemium ((PPS)), REA Group, ResMed, Synlait Milk ((SM1)), and Xero ((XRO)) have kept up their performance despite many criticising their valuations – in all cases this was underpinned by robust results that at the very least met elevated expectations.

The share market's polarisation has been firmly on display post the February reporting season and it'll be anyone's guess whether the upcoming August results season might deliver the change in dynamics so many value-investors have been waiting for. My guess is that the underlying bifurcation between the Haves and the Have Nots is unlikely to change soon, but let's wait and see what August has to offer.

No matter how well prepared one can probably be, every season delivers unexpected surprises, in addition to one or two hallmark events. This year earnings estimates are rising, albeit slightly, and predominantly because analysts are marking-to-market commodity prices, while also incorporating a weaker Aussie dollar into their models.

Insurance companies seem to enjoy a favourable wind ahead of the season. Miners and energy producers seem poised for solid performances, with capital management certain to be on the agenda. But there are equally very few who anticipate disappointment from CSL ((CSL)), or from ResMed, or from Charter Hall ((CHC)), or Goodman Group ((GMG)).

As per always, companies that manage to positively surprise, and force analysts to upgrade forecasts, often enjoy positive momentum for many months after the reporting season. Those who fail to meet expectations can often expect severe punishment, in particular if the share price has rallied prior, or if the longer term trajectory is being called into question.

Quant analysts at Macquarie have singled out Lovisa Holdings ((LOV)), Qantas ((QAN)), a2 Milk ((A2M)), Nine Entertainment ((NEC)) and Emeco Holdings ((EHL)) as likely candidates to deliver a positive surprise in August. On the other hand, their quant modeling shows Ramsay Health Care ((RHC)), Tabcorp ((TAH)), Western Areas ((WSA)), Commbank ((CBA)) and Japara Healthcare ((JHC)) are most likely to disappoint with their results releases.

All shall be revealed over the coming six weeks.

From the moment the corporate results season starts gaining genuine traction, FNArena's dedicated corporate results monitor shall be refreshed and updated daily (see website or the link above).

By then we will also add an extra compartment that covers the monitors we produced since August 2013; for those who like to analyse past data, percentages and company performances.

The Monitor for this year's March-mid-July period will be attached when this story is published on the website on Wednesday morning.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

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