Rudi's View | Mar 04 2021
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A February For The Record Books
By Rudi Filapek-Vandyck, Editor FNArena
It has been a while since a corporate results season in Australia was mostly about corporate performances. The last time this happened was, according to my memories, February 2018.
Back then, investors weren't so sure whether strong share price performances for companies including Altium and Appen could be maintained, but their financial market updates proved the doubters wrong.
Every subsequent season since has been overshadowed by macro forces, albeit to different degrees and mostly through attempts to rotate away from Quality and Growth into Banks, Value and Cyclicals.
The February 2021 season has proved a little different. That oft attempted, but seldom sustainable market rotation into banks, miners and energy producers is by now five months old, and it has been solidified throughout the month with investors unambiguously showing their preference for share market laggards that stand to benefit from the rollout of vaccines globally and the re-opening of regional and international borders.
At times it was almost heartbreaking to observe how strong performances from covid-winners would receive no reward, at best, while for companies such as Webjet ((WEB)) and Flight Centre ((FLT)) it almost didn't matter what financial results were being released as investors are keeping their attention firmly focused on the fact that global borders will re-open, exact timing unknown.
In 2021, the return of broad-based optimism about the economic recovery ahead has started to translate into higher bond yields which, in turn, have looped back into a weakening US dollar (stronger AUD) and a universal approval for investors to again start accumulating shares in small mining companies, banks, oil & gas producers, steel, construction and building materials, contractors and mining services providers, and other industrial cyclicals.
The sharp rise in bond yields was the big shadow hanging over February this year. Not only did it provide too big a headwind for most covid-beneficiaries, it also reignited market debate whether unprecedented stimulus and government support programs are heralding the return of consumer price inflation, which would justify even higher yields.
Central bankers joined the debate. They said: no, it doesn't. The alternative view is that bond yields fell in 2020 because of the global pandemic and as market optimism grows, those yields are simply pricing out the virus impact. On the first Monday of March, the RBA used its money printing power to put a halt to what risked becoming an unruly trend that could well grow beyond control. The Fed had been signalling similarly on the final February Friday.
Whether this settles this debate once and for all is highly unlikely, but if the temperature on bond markets cools down, which would be the prime target for central banks the world around, then at least equity investors can start focusing again on corporate earnings, balance sheets, quality of business models, structural trends and valuations.
For investors, maybe the key challenge is to find a portfolio balance between direct winners from higher bond yields and this year's economic recovery and those robust business models that might be temporary out of favour, also because they performed so well in the past, but whose runway for growth continues to be supported by new structural mega-trends and tectonic shifts into tomorrow's technology-driven new economic reality.
Certainly, a less dominant theme of rising bond yields will much easier allow companies such as ResMed ((RMD)), Xero ((XRO)), Charter Hall ((CHC)) and Altium ((ALU)) to regain firmer footing, and thus investors' attention.
Having said all of the above, there is no denying a rather large number of highly popular, highly valued, strongly growing businesses have come up short these past few weeks, which has weighed upon share prices irrespective of bond market shenanigans.
The aforementioned Altium is one of them, but we can easily add a2 Milk ((A2M)), Appen ((APX)), Nanosonics ((NAN)), and many of the smaller cap technology sweethearts, including Aerometrex ((AMX)), Bravura Solutions ((BVS)), Catapult Group ((CAT)), Infomedia ((IFM)), ResApp Health ((RAS)), Temple & Webster ((TPW)), and others.
During a time when share market laggards -from the banks to Western Areas ((WSA)), and from Lynas Rare Earths ((LYC)) to Telstra ((TLS))- proved they are still worth investor attention, as long as the economic recovery remains on schedule, many of the former can-do-no-wrong share market darlings revealed some of their own vulnerabilities and weaknesses. When taking a broad view, this even includes Australia's Champion among Champions, CSL ((CSL)).
No doubt, for some investors this has further galvanised their appetite for more cyclicals and less Quality, Defensives and Growth, but one needs to keep in mind the theme of backing last year's covid-victims will run its course at some point, while central banks remain convinced there is no sign of sustainable inflation on the horizon. I also believe there is one important message that should not be ignored from several of this season's failures, and that is that disruption and tectonic shifts that used to dominate the landscape until late last year are still around.
Beyond the short-to-medium term focus of the market sentiment pendulum, those shifting tectonic plates will continue to challenge moribund, under-invested business models even though there is equally a valid argument in that the accelerating shift towards decarbonisation of economies is creating a whole set of fresh dynamics, while it should be easier for companies to restructure, re-align and reinvent themselves when economic growth is strong (or so goes the theory).
Every reporting season opens up a list of major failures and disappointments and this time AGL Energy ((AGL)) delivered one of the eye-catching, negative performances. Investors best not be bamboozled by the seemingly high dividend yield on offer. AGL's share price has been in decline for over four years as the power network operator and electricity generator struggles to combine old world coal fired power stations with new world renewables and the need for more grid flexibility. It is but an existential dilemma for all to witness; one that is unlikely to be resolved by simply separating the dirty coal operations.
In the same vein, Unibail-Rodamco-Westfield ((URW)) might be the proud owner of several of the highest quality shopping malls around the world, but burdened by too much debt, lockdowns, the shift to online and the threat of ongoing asset devaluations, management's task of manufacturing a successful transformation is not being made any easier, irrespective of this year's recovery. Those who jumped on board because of the perceived value in the assets, while the shares looked exceptionally cheap, are now facing the prospect of two years of no dividend payments.
Another one of February's spectacular disappointments was delivered by machine learning and artificial intelligence data and services provider, Appen. While the need for such data and services will remain high in the years ahead, Appen's small base of key customers seems to have injected more price competition among suppliers and Appen, valued as a high growth company with sheer unlimited potential, has felt the repercussions through a gigantic share price devaluation, taking the price down by more than -50% since August last year but, and this remains the sad indictment for those who are still holding on, with ongoing risk for further negative surprises.
Investors equally did not respond in kind when Coles Group ((COL)) suggested it had to invest more to future-proof the business, while growth might temporarily turn negative when compared to last year's big boost from covid lockdowns. As such, the supermarket operator might as well have rung the bell for last year's covid beneficiaries in general which are facing tough comparables to beat in 2021, while the opposite remains the case for last year's laggards including the banks, who managed to crown themselves as the Super-Duper Come Back Kids in February, with ongoing promise of higher dividends, and even special payouts, as the recovery materialises.
All in all, it has to be said, February delivered very few true disappointments, unlike most reporting seasons. After combining 335 reporting companies over the month, the FNArena Corporate Results Monitor has placed less than 12% (40 companies in total) in the sin bin for missing market expectations, and many of those are perennial underperformers and repeat offenders, including Ardent Leisure ((ALG)), iSentia ((ISD)), 3P Learning ((3PL)), Cimic Group ((CIM)), and Humm Group ((HUM)).
The local technology sector was a magnet for reductions in forecasts this season.
At the other end of the spectrum, 160 companies, or nearly 48% beat market expectations and that's an achievement we have never witnessed since we started keeping reporting season statistics here at FNArena. Or have we? Strictly taken, last year's 49 reporters in between September and December generated 49% "beats" but also 29% in "misses" so I think we can still call February 2021 the best reporting season in Australia post-GFC.
It can also be argued both seasons are two peas from the same pod, so to speak. Usually the percentage of beats ranges between 24% (bad) and 38% (very good).
Banks, Materials (ex-mining), Insurance and Retailers enjoyed the strongest forecast upgrades over the season. Analysts at Macquarie believe the first three will continue to benefit from improving global growth and vaccines, while retailers will face headwinds due to vaccines and spending being redirected back to services, which explains some of the hesitant share price movements post results.
On Macquarie's analysis, "true" upgrades were delivered by Nine Entertainment ((NEC)), Bendigo & Adelaide Bank ((BEN)), Suncorp ((SUN)), Treasury Wines ((TWE)), BlueScope Steel ((BSL)), JB Hi-Fi ((JBH)), Woolworths ((WOW)), Northern Star ((NST)), Wesfarmers ((WES)), Star Entertainment ((SGR)), Tabcorp Holdings ((TAH)), Vicinity Centres ((VCX)), Commbank ((CBA)), Boral ((BLD)), and Seek ((SEK)) among the ASX100 companies.
Outside the ASX100, the analysis identified Lovisa Holdings ((LOV)), Nearmap ((NEA)), Pinnacle Investment Management ((PNI)), Codan ((CDA)), Platinum Asset Management ((PTM)), Sims ((SGM)), nib Holdings ((NHF)), Pact Group ((PGH)), Seven West Media ((SWM)), ALE Property ((LEP)), Estia Health ((EHE)), Nick Scali ((NCK)), Cooper Energy ((COE)), Mayne Pharma ((MYX)), ARB Corp ((ARB)), and Wagners Holding Company ((WGN)).
I don't want to be super-mean about Wagners, but any objective observer will agree with me it hasn't been a great success since listing on the ASX. The fact this company is being nominated as one of the stand-out positive performers in February shows us all these are all but unusual circumstances.
The minor disappointment is both numbers for beats and misses looked simply spectacular throughout the opening two weeks of February. In particular the number of beats shrunk noticeably as the end of the season approached. Note to myself: companies that are ready to release not-so-fantastic results prefer to hide in the later parts of the season. Overall, however, earnings growth projections rose throughout the month (usually they fall during reporting season) with iron ore miners and banks major contributors.
The average individual target price increase was 5.64% while all 335 targets in aggregate rose by 6.29%. These are not the highest increases on record, but still high.
If it wasn't for the acceleration in bond market sell-offs (yields rallying higher), investors might have enjoyed stronger and longer-lasting share price responses to match February's above-average outcome. At the same time, it's good to remind ourselves expectations were low across the board and many businesses responded to last year's challenge by cutting back on expenses, including capex in many cases, while also enjoying extraordinary support through rent relief and the federal government's Jobkeeper program.
And while market strategists at Macquarie believe many of this season's surprises were caused by higher-than-forecast profit margins, supported by better-than-anticipated sales and revenues, the December quarter business indicators in Australia, released on Monday, revealed company profits fell sharply by -6.6% as government stimulus payments ceased.
Even though some economists had penciled in a potentially worse outcome, this extra data insight can serve as an unofficial warning this is by no means a time to allow complacency to creep in.
Previous updates on the February reporting season in Australia:
-A Supercycle In Dividends: https://www.fnarena.com/index.php/2021/02/25/rudis-view-a-supercycle-in-dividends/
-Yet Another Short Selling Failure https://www.fnarena.com/index.php/2021/02/18/rudis-view-yet-another-short-selling-failure/
-A February Full Of Promise https://www.fnarena.com/index.php/2021/02/12/rudis-view-a-february-full-of-promise/
-February Feeding Market Optimism https://www.fnarena.com/index.php/2021/02/11/rudis-view-february-feeding-market-optimism/
-February – Reason For Optimism https://www.fnarena.com/index.php/2021/02/04/rudis-view-february-reason-for-optimism/
(This story was written on Monday 1st March, 2021. It was published on the day in the form of an email to paying subscribers, and again on Thursday 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: firstname.lastname@example.org or via the direct messaging system on the website).
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For more info SHARE ANALYSIS: 3PL - 3P LEARNING LIMITED
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